Five Bond Funds That Look Outside the Box for Yield

With interest rates at their highest levels in years and the Federal Reserve gearing up for its first interest rate cut, many investors are still looking for ways to add yield to their portfolios.

While bond funds pay out income by nature, some offer more than others. Higher yields generally come with greater risks, but some funds that Morningstar analysts have awarded Medalist Ratings rank highest at generating income.

We screened for funds carrying Medalist Ratings of Gold, Silver, or Bronze with 100% analyst coverage among the five largest bond fund categories. Those categories are intermediate core bonds, ultrashort bonds, intermediate government, corporate bonds, and short-term bonds. The funds were then ranked by 30-day SEC yield.

These funds had the highest yields in each of those categories:

• Guggenheim Core Bond GIUSX
• Invesco Ultra Short Duration ETF GSY
• American Funds US Government Securities RGVGX
• Invesco Corporate Bond ICBFX
• PGIM Short Duration Multi-Sector Bond SDMQX

These funds don’t necessarily target higher yields. Rather, that’s generally a result of hunting for undervalued bonds, which generate higher yields through relatively lower prices.

All five of these funds also rank in the top quartile of their categories based on 10-year annualized total return, with all but one (the $2.1 billion Invesco Ultra Short Duration ETF) in the top decile.

Performance data for this article was based on the lowest-cost share class for each fund. Some funds may be listed with share classes not accessible to individual investors outside retirement plans. The individual investor versions of those funds may carry higher fees, reducing returns to shareholders.

Thinking Outside the Index

A common factor among these funds is a willingness to make somewhat unusual bets for their categories, investing in areas where they think there is value, boosting their yields. Buying assets with depressed values raises yields because bond yields rise when prices fall.

“Most funds are pretty benchmark-sensitive, and they may hold some on-benchmark things, but that’s more on the margins,” says Eric Jacobson, director of manager research, US fixed-income strategies at Morningstar.

For example, the $1.9 billion Guggenheim Core Bond Fund will buy large amounts of cheap assets, even if they’re not in the Bloomberg US Aggregate Index. As Jacobson explains it, the fund will instead buy large stakes in assets even if they’re not in broad indexes, as long as the managers think the assets are attractively priced, and it will sell out of bonds they think are expensive, even if they’re widely held by its benchmark.

One example is securitized debt—loans that are packaged together and sold off by lenders. Currently, they make up 41% of the Guggenheim fund’s holdings, despite making up only 3% of the Morningstar US Core Bond Index and less than 30% of the Bloomberg Barclays Aggregate Bond Index. According to Jacobson, this willingness to buy cheap assets regardless of where they’re found (or refrain from buying assets when they’re expensive) is what’s helped the fund attain its 2.46% annualized return over the past decade, putting it in the top 2% of funds in its category. Buying inexpensive assets boosts the fund’s yield as yields and prices move in opposite directions.

Another fund bucking its category’s trends is the $3.5 billion Invesco Corporate Bond Fund. Morningstar research analyst Thomas Murphy points to its willingness to hold more high-yield bonds (often called junk bonds) than its peers in the corporate bond category. Murphy says, “Typically, [the fund’s high yield] exposure is around 10%-20% [of its portfolio]. Putting that into perspective, the median fund has about 1%”