In recent times, investors’ interest has shifted more toward taxable bond funds than equity funds. As per the January Morningstar monthly fund flow report, taxable bond funds caught investors’ fancy as these funds attracted the highest monthly inflows among all the category groups. Also, in February, the fund category group attracted high inflows, per Investment Company Institute (ICI).
Taxable bond funds are debt securities whose interest income is taxable at state or federal levels. Funds from this category carry higher risks as well as better yields than government bond funds. Hence, investing in taxable bond funds might be a wise option for bond fund investors willing to take on relatively more risk in search of higher returns.
Taxable Bond Funds Register Strong Monthly Inflows
According to a recent Morningstar report, fund flows for all key category groups for the month of January was $128.1 billion, the best since January 2013. Taxable bond funds, which registered the highest monthly inflows of $47 billion among all the category groups, distributed its investment almost equally in both passive and active funds.
Moreover, per ICI, taxable bond mutual funds witnessed estimated inflows of $2.959 billion for the week ended Feb 28. In contrast, domestic equity mutual funds registered weekly outflows of $6.364 billion. Per ICI, domestic equity mutual funds posted outflows of $22.068 billion for the month of February, while taxable bond mutual funds reported monthly inflows of $3.083 billion during the same period.
Moreover, Trump’s recent tariff-related uncertainty and White House's Chief Economic Advisor Gary Cohn’s resignation resulted in a decline in treasury yields. Given such dissuading events, investors interested in bond funds shifted their focus more toward taxable bond funds, which offer an appreciably higher rate of returns than the other bond fund classes.
Why Buy Taxable Bond Funds?
Taxable bonds are fixed-income securities issued by the country or state, the income from which is not tax-exempt. These kinds of bonds are used to fund a particular project or facility. Taxable bond funds are likely to yield better results banking on improving manufacturing activity and continuing job creation. So, mutual funds with strong exposure to various taxable bonds are considered prudent investment options in an environment of steadily rising GDP.
According to Morningstar, all the categories of taxable bond funds have generated encouraging one-year and three-month returns. Emerging markets local-currency bond funds have returned 2.9%, 13.5% and 5.1% over the one-year and three-month time frame, respectively. Also, bank-loan funds have registered one-year and three-month returns of 3.4% and 1.2%, respectively. Further, world bond funds managed one-year and three-month returns of 6.8% and 1%, respectively.
Buy These 5 Taxable Bond MutualFunds
This encouraging domestic backdrop calls for focus on five taxable bond mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) and have encouraging dividend yields. Moreover, these funds have impressive one-year and three-year returns, 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.
Payden Emerging Markets Bond Adviser (PYEWX - Free Report) invests a bulk of its assets in debt securities which are issued by governments and agencies located or headquartered the emerging market nations. PYEWX seeks maximization of returns.
This fund has a history of positive total returns for over 10 years. Specifically, the fund's returns over the one and three-year benchmarks are 7% and 6.1%, respectively. VQNPX has an annual expense ratio of 1.00%, which is below the category average of 1.17%. Theannual dividend yield of the fund is 4.90%.
Oppenheimer International Bond Y (OIBYX - Free Report) seeks return. OIBYX invests its assets heavily in debt securities issued by companies based in developed and emerging markets. The fund invests in more than three different countries other than the United States. The fund invests in companies irrespective of their market caps.
This fund has a history of positive total returns for over 10 years. Specifically, the fund's returns over the one and three-year benchmarks are 11.3% and 5.1%, respectively. OIBYX has an annual expense ratio of 0.80%, which is below the category average of 0.98%.Annual dividend yield of the fund is 4.11%.
Vanguard Long-Term Investment-Grade Investor (VWESX - Free Report) seeks appreciation of income and invests the majority of its assets in intermediate- and long-term investment-grade securities. The fund’s dollar-weighted average maturity is believed to vary by five years around the maturity period of its benchmark index.
This fund has a history of positive total returns for over 10 years. Specifically, the fund's returns over the one and three-year benchmarks are 5.9% and 3.9%, respectively. VWESX has an annual expense ratio of 0.22%, which is below the category average of 0.83%.Annual dividend yield of the fund is 3.81%.
Voya Global Bond W (IGBWX - Free Report) seeks higher returns through growth of income and capital. IGBWX invests a bulk of its assets in a wide variety of countries, including the United States. The fund invests mainly in investment-grade securities. The dollar-weighted average portfolio maturity of IGBWX ranges from two to nine years.
This fund has a history of positive total returns for over 10 years. Specifically, the fund's returns over the one and three-year benchmarks are 9.9% and 4.3%, respectively. IGBWX has an annual expense ratio of 0.65%, which is below the category average of 0.98%. Annual dividend yield of the fund is 3.50%.
Thrivent Limited Maturity Bond Fund A (LBLAX - Free Report) seeks a high level of income. LBLAX invests the lion’s share of its assets in preferred stocks or debt securities that are rated in the Baa or BBB categories. The fund focuses primarily on bonds with maturities between one and five years.
This fund has a history of positive total returns for over 10 years. Specifically, the fund's returns over the one and three-year benchmarks are 1.5% and 1.5%, respectively. LBLAX has an annual expense ratio of 0.61%, which is below the category average of 0.76%.Annual dividend yield of the fund is 1.69%.
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