Bond prices have seen fluctuations in recent years due to Federal Reserve interest rate hikes aimed at managing high inflation. However, with signs that rate increases could halt, investors might find appealing yields in short-term bonds.

Here’s an overview of short-term bond funds and some top options to consider for your portfolio.

What are short-term bond funds?

Short-term bond funds encompass mutual funds and exchange-traded funds (ETFs) that generally invest in government and corporate bonds maturing in less than five years. These bonds are less sensitive to interest rate changes compared to longer-term bonds, reducing potential losses if rates increase. It’s important to note the inverse relationship between interest rates and bond prices: as rates rise, bond prices typically fall, and vice versa.

Investors in short-term bond funds earn a yield, reflecting the income generated by the bonds in the portfolio relative to their current market value.

Who should invest in short-term bonds?

Short-term bond funds are suitable for a wide range of investors, especially those saving for short-term goals. Investing money earmarked for needs within the next three to five years in short-term bonds allows for earning a reasonable rate of return with relatively lower risk.

Before investing, it’s crucial to pay attention to a fund’s expense ratio, which represents its fees. Generally, lower expense ratios are advantageous for investors, as they can potentially maximize returns over time.

Top short-term bond funds

SPDR Portfolio Short-Term Corporate Bond ETF (SPSB)

The SPDR Portfolio Short-Term Corporate Bond ETF seeks to mirror the Bloomberg U.S. 1-3 Year Corporate Bond Index. This ETF provides access to U.S. corporate bonds maturing within one to three years.

Here are its key metrics:

  • SEC yield: 5.32 percent
  • Expense ratio: 0.04 percent
  • AUM: $7.6 billion

iShares 1-5 Year Investment Grade Corporate Bond ETF (IGSB)

The iShares fund targets the performance of an investment-grade corporate bond index featuring maturities from one to five years. It holds bonds issued by major entities like Bank of America, JPMorgan Chase, and Microsoft.

Key statistics include:

  • SEC yield: 5.29 percent
  • Expense ratio: 0.04 percent
  • AUM: $20.3 billion

Schwab 1-5 Year Corporate Bond ETF (SCHJ)

The Schwab 1-5 Year Corporate Bond ETF aims to mirror the total return of an index that tracks the short-term U.S. corporate bond market. It invests in corporate bonds with remaining maturities ranging from one to five years.

Key statistics include:

  • SEC yield: 5.25 percent
  • Expense ratio: 0.03 percent
  • AUM: $403.4 million

Vanguard Short-Term Bond ETF (BSV)

The Vanguard Short-Term Bond ETF seeks to replicate the performance of a market-weighted bond index composed of investment-grade bonds. These bonds have a dollar-weighted average maturity ranging from 1 to 5 years. The fund holds a diversified mix of government bonds, high-quality corporate bonds, and investment-grade international dollar-denominated bonds.

Key statistics include:

  • SEC yield: 4.83 percent
  • Expense ratio: 0.04 percent
  • AUM: $32.3 billion

Fidelity Short-Term Bond Fund (FSHBX)

The Fidelity Short-Term Bond Fund focuses on generating current income while safeguarding capital. It usually allocates at least 80 percent of its assets to various types of investment-grade debt instruments. The fund maintains a dollar-weighted average maturity of three years or less.

Here are its key metrics:

  • SEC yield: 4.96 percent
  • Expense ratio: 0.30 percent
  • AUM: $2.3 billion

In Conclusion

Short-term bond funds provide a suitable option for investing funds earmarked for short-term needs. While they offer greater safety compared to high-yield bonds or stocks, they aren’t entirely risk-free. For investors seeking yields with even lower risk, money-market funds could be a viable alternative.