After a good start to 2023 with two consecutive winning weeks, Wall Street shrank at the first signs of robust economic data coming in from the labor market this past week. Even the Consumer Price Index numbers from the week before, which showed that inflation was definitely on its way down, were not enough for investors to be completely confident that the Fed would be dovish going forward and will be bringing the interest rates down.
We continue to be in a volatile market, and with mega-cap companies announcing mass layoffs, a recession seems imminent even as inflation goes down. What has not helped are mixed signals coming in from the central bank, and all eyes remain fixated on its February meet, for the direction forward.
In such uncertain times, investors look to add safety to their portfolios. They keep looking for a strategy where they can generate a steady flow of income while minimizing risk. Investing in the debt market does have its cons in a macroeconomic scenario like the one prevailing currently. However, when major bond rating agencies certify certain bond funds as investment grade, these become almost guaranteed instruments of investment.
Investment-grade bonds funds comprise such corporate and government debt that bond rating agencies like Fitch, Moody’s, and S&P suggest are very likely to be paid back, that too, with interest. These agencies grant ratings to these bond funds by weighing their risk and return potential. The top-rated bonds out of these are considered investment grade. These are considered less risky than stocks as they do not experience the same price fluctuations, being defensive in nature.
When a company goes bankrupt, bondholders get preference over shareholders. So, in volatile markets, at least the amount invested is fully secure in the case of these bond funds. They also generate a steady stream of income via interest payments. However, it is essential for investors looking to check the credit quality rating of a fund while venturing into the debt market. Bonds that are rated low are inherently speculative in nature and do not serve the purpose of reducing risk.
U.S. bond funds attracted their biggest weekly inflow in 18 months at the beginning of January on signs of cooling inflation. Investors purchased U.S. short-term investment-grade funds of $3.63 billion in their biggest buying spree since January 2022, in an effort to lend stability to their portfolios. This may not be the right time for speculation. On the contrary, this may be the time to add a safety net to one’s portfolio. Investment-grade bond funds provide a much-required canopy when the heat is on and continue to provide a steady income.
Hence, with an economic slowdown looming large in the U.S. economy, astute investors can look to invest in investment-grade bond funds at present. Mutual funds, in general, reduce transaction costs and diversify portfolios without an array of commission charges that are mostly associated with stock purchases (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
We have thus selected three such investment-grade bond funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy), 2 (Buy), have positive three-year and five-year annualized returns, minimum initial investments within $5000, and carry a low expense ratio.
Payden Limited Maturity Fund (PYLMX – Free Report) invests in a wide range of debt instruments and income-producing securities payable primarily in dollars. PYLMX invests the lion’s share of its total assets in investment-grade debt securities, but may invest a very small part in debt securities rated below investment grade. The overall average credit quality of the fund will remain investment grade.
The three top holdings of PYLMX are 50.3% in Total Misc Bonds, 14.8% in Total Cash, and 3.6% in US Cash Management Bill.Mary Syal has been the lead manager of PYLMX since Feb 27, 2008.
PYLMXhas 3-year and 5-year annualized returns of 0.9% and 1.5%, respectively. Its net expense ratio is 0.25% compared to the category average of 0.44%. PYLMX has a Zacks Mutual Fund Rank #1. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.
Virtus Newfleet Short Duration High Income Fund (ASHAX – Free Report) seeks to achieve its investment objective by normally investing most of its net assets in debt securities, which are rated below investment grade, while maintaining an average duration of fewer than three years, and in derivatives and other synthetic instruments that have economic characteristics similar to such debt securities.
Three top holdings of ASHAX are 19.7% in Total Misc Bonds, 3.2% in PBF Holding, and 3.1% in Millenium Escrow. Francesco A. Ossino has been the lead manager of ASHAX since Jul 24, 2022.
ASHAXhas 3-year and 5-year annualized returns of 1.5% and 2.2%, respectively. Its net expense ratio is 0.86% compared to the category average of 0.95%. ASHAX has a Zacks Mutual Fund Rank #1.
USAA Short Term Bond Fund (USSBX – Free Report) invests most of its assets in a broad range of investment-grade debt securities that have a dollar-weighted average portfolio maturity of three years or less. These securities may include obligations of U.S., state, and local governments, mortgage-backed securities and asset-backed securities, corporate-debt securities, repurchase agreements; and other securities believed to have debt-like characteristics.
The three top holdings of USSBX are 66.2% in Total Misc Bonds, 12.6% in Total Cash, and 1.1% in BBVA Bancomer. Julianne W. Bass has been the lead manager of USSBX since Jan 3, 2007.
USSBXhas 3-year and 5-year annualized returns of 0.9% and 1.8%, respectively. Its net expense ratio is 0.56% compared to the category average of 0.68%. USSBX has a Zacks Mutual Fund Rank #1.
Versatile Bond Portfolio (PRVBX – Free Report) seeks to earn high current income while limiting risk to the principal by investing the majority of its assets in a diversified portfolio of corporate bonds rated ‘A’ or higher by Standard & Poor’s and having a remaining maturity of 24 months or less. Dividends and capital gains are distributed annually.
Three top holdings of PRVBX are 11.7% in Total Preferred Stocks, 6.9% in BAT Capital, and 6.4% in El Paso Energy. Michael Joseph Cuggino has been the lead manager of PRVBX since Apr 30, 2003.
PRVBX’s 3-year and 5-year annualized returns are 2.1% and 3.5%, respectively. Its net expense ratio is 0.65% compared to the category average of 0.68%. PRVBX has a Zacks Mutual Fund Rank #1.
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