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Mutual Fund Commentary

For the past few weeks, investors’ interest has clearly shifted toward taxable bond funds from equity funds. According to Lipper’s fund flow report, taxable bond funds have registered 3 consecutive weeks of inflows. Moreover, taxable bond funds registered a better performance in the third quarter as compared to its non-tax counterparts, despite a weak September.

Hence, investing in taxable bond funds might be a wise investment option. Taxable bond funds are known as debt securities whose interest income is taxable at state or federal levels. Funds from this category have higher risks as well as better yields than government bond funds. Although taxable bond funds have lower yields than tax-free bond funds, it also has comparatively lesser risks.

Taxable Bond Funds Register Stable Inflow

As per the latest Lipper weekly fund flow report, equity-based funds have seen heavy outflows whereas taxable bond funds have been hogging the spotlight. According to Lipper, taxable bond funds registered net inflows of $2.9 billion for the week ending Oct 5, preceded by an inflow of $4.8 billion posted a week earlier. The category saw inflows for three consecutive weeks, after registering outflows of $2.9 billion for the week ending Sep 14.

Despite an uncertain September on Fed rate hike concerns, taxable bond funds managed to provide encouraging returns in the third quarter. Meanwhile, the Fed’s decision to keep interest rates unchanged had a negative impact on tax-free debt securities like municipal bond funds. 

According to preliminary Lipper data, taxable bond funds increased 0.3% in September and more than 2% in the last quarter. On the other hand, tax-exempted bond funds decreased 0.6% last month and 0.2% in the third quarter.

Why Buy Taxable Bond Funds?

Taxable bonds are mainly fixed-income securities which are issued by the country or state, whose income is not tax-exempted. These kinds of bonds are used to fund a particular project or facility. Taxable bond funds are even poised to yield better results banking on improving manufacturing and services activity and continued job creation. So, mutual funds with strong exposure to various taxable bonds are considered prudent investment options.

According to Morningstar, all the categories of taxable bond funds have generated encouraging year-to-date (YTD) and one-year returns. The emerging markets bond funds returned 13.2% and 11.5% over the YTD and one-year time frame, respectively. Also, the long-term bond funds reported YTD and one-year returns of a respective 12.7% and 11.1%. Further, the high-yield bond funds managed to register YTD and one-year returns of 11.7% and 7.6%, respectively.

Buy These 4 Taxable Bond Mutual Funds

This encouraging backdrop calls for investors’ attention to four taxable bond mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) and have encouraging yields. Moreover, these funds have impressive YTD, one-year and three-year annualized returns. They also have minimum initial investment within $5000 and low expense ratios.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

Eaton Vance High Income Opportunities A (ETHIX - Free Report) seeks growth of income and capital. ETHIX invests the bulk of its assets in fixed-income securities like convertible securities and preferred stocks. The fund focuses on investing mainly in high risk, high yield corporate bonds.

ETHIX has an annual expense ratio of 0.90%, lower than the category average of 1.06%. The fund has year-to-date, one-year and three-year annualized returns of 11.2%, 8.6% and 5.3%, respectively. Annual dividend yield of the fund is 4.9%.

T. Rowe Price Emerging Markets Bond (PREMX - Free Report) invests the lion’s share of its assets in debt securities of emerging market governments or companies located in emerging market countries. PREMX seeks growth of income and capital. The fund generally invests in debt securities like sovereign and corporate bonds.

PREMX has an annual expense ratio of 0.93%, lower than the category average of 1.14%. The fund has year-to-date, one-year and three-year annualized returns of 17.1%, 15.9% and 6.5%, respectively. Annual dividend yield of the fund is 5.6%.

Vanguard Long-Term Investment-Grade Investor (VWESX - Free Report) seeks appreciation of income. VWESX invests majority of its assets in intermediate- and long-term investment-grade securities. The fund’s dollar-weighted average maturity is believed to vary by 5 years around the maturity period of its benchmark index.

VWESX has an annual expense ratio of 0.21%, lower than the category average of 0.76%. The fund has year-to-date, one-year and three-year annualized returns of 13.2%, 12.7% and 9.8%, respectively. Annual dividend yield of the fund is 3.8%.

American Century High-Yield Investor (ABHIX - Free Report) invests a major chunk of its assets in various debt instruments, including high-yield bonds. ABHIX seeks appreciation of income and capital. The fund also invests nearly 40% of its assets in fixed-income debt obligations of foreign companies.

ABHIX has an annual expense ratio of 0.85%, lower than the category average of 1.06%. The fund has year-to-date, one-year and three-year annualized returns of 13.3%, 8.1% and 3.4%, respectively. Annual dividend yield of the fund is 5%.

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