Since Wednesday was PI day (3.14), I thought I might update my PI trade article, says Dave Landry, f...
S&P Eyes Short-Term Bond Funds
12/30/2014 8:00 am EST
When interest rates increase, bond prices tend to decrease. The magnitude of this interest rate sensitivity is measured through duration, explains Todd Rosenbluth, S&P Capital IQ Director of Mutual Fund Research in S&P Marketscope.
A bond mutual fund with an average duration of two-and-a-half years should expect a 250 basis point decline in value if rates increase 100 basis points, while a bond mutual fund with an average duration of five years should expect a 500 basis point decline.
So investors seeking to protect against potentially higher rates in 2015 should consider short-term funds.
We contend that when choosing a short-investment-grade bond fund, which typically has duration below two-and-a-half years, investors should consider a number of factors.
We highlight two funds that have relatively strong risk-adjusted track records, above-average 30-day SEC yields, and below-average expense ratios.
These and other factors are part of the S&P Capital IQ mutual fund ranking on approximately 3,500 taxable bond mutual fund share classes.
4-star rated Lord Abbett Short Duration Income Fund (LALDX) rose 3.6% in the three-year period ended December 5, ahead of the 1.7% peer average. While its standard deviation is slightly higher, its Sharpe ratio of 2.5 is much stronger (1.1 for its peers).
The fund sports a 2.5% 30-day SEC yield, (0.90% peer average), due in part to 20% exposure to speculative-grade bonds that incur above-average credit risk. Further helping its ranking is a modest 0.58% expense ratio, below its 0.82% average.
5-star rated Vanguard Short-Term Investment Grade Fund (VFSTX) climbed 2.5% in the three-year period and has an above-average Sharpe ratio of 1.8.
The fund's 30-day SEC yield of 1.4% is also higher than its peers, but lower than LALDX as it has just 2% in speculative-grade bonds. The Vanguard fund has a significantly lower than average 0.20% expense ratio.
Both funds have exposure to domestic and international corporate bonds, though LALDX has a larger position in US mortgage bonds than VFSTX. We believe these are two strong funds for investors to consider if they believe interest rates will move higher in 2015.
More from MoneyShow.com:
Related Articles on STRATEGIES
Activist investing continues to gain advocates — and capital; according to Hedge Fund Research...
While the Dow has not stayed on the balance line we’ve discussed in recent updates, last Frida...
We must apply a high degree of logic in our daily lives to survive and prosper. Yet, in trading, the...