What You Should Know Before Choosing a Core Bond Fund


Core bond fund is the name given to bond funds that act as the centerpiece of your bond fund investments.  They are generally well diversified across the US Investment grade bond market which includes US Government, Corporate, Agency and Mortgage related bonds (tax free municipal bond funds are not normally included).  A core bond fund can be the only bond fund an investor holds, or used as the anchor bond fund in their portfolio, which is then supplemented with smaller investments in other bond funds like emerging market and high yield bond funds.

Here is a list of the core bond funds that we rate here at Learn Bonds.  For more on our rating criteria go here.  See all the funds we rate here.

Our Core Bond Fund Ratings

Fund Name Active or Passive? LB RatingLB Rating Report
DoubleLine Total Return Bond Fund (DLTNX)Active5 StarsDLTNX LB Rating Report
PIMCO Total Return Fund (PPTDX)Active5 StarsPPTDX LB Rating Report
Vanguard Total Market Bond Fund (BND)Passive5 StarsBND LB Rating Report
iShares Barclays Aggregate Bond Fund (AGG)Passive4 StarsAGG LB Rating Report
 Western Asset Core Plus Bond Fund (WACIX)Active4 Stars WACIX LB Rating Report
Vanguard GNMA Fund (VFIIX) Active4 Stars VFIIX LB Rating Report
 Loomis Sayles Investment Grade Bond Fund (LIGRX) Active 3 Stars LIGRX LB Rating Report
JP Morgan Core Bond Fund (PGBOX)Active3 StarsPGBOX LB Rating Report 
Bond Fund of America (ABNDX) Active2 StarsABNDX LB Rating Report 

Most bond funds in the Intermediate Term Bond Fund category, which are funds that hold bonds with an average maturity of between 4 and 10 years, also match the above description, and are therefore considered to be core bond funds as well.  The performance of both intermediate term and core bond funds is normally measured or “benchmarked” against the Barclays Aggregate Bond Index which holds the following types of bonds:

Bond TypePercentage of Index (June 2012)
US Treasury (excluding TIPs)34.96%
Government Related10.66%
Mortgage Backed Securities (Investment-Grade)30.64%
Corporate Bonds (Investment-Grade)20.58%
Asset Backed Securities.25%
Commercial Mortgage Backed Securities1.88%

The index includes bonds from short to long term, however the average maturity of the index is in the intermediate range (currently around 5.1 years).

If the fund is a passively managed index fund then it will strive to match all 4 variables in the index (bond type, rating, maturity and weighting) as closely as possible.  If the fund is an actively managed fund then it will generally also match the index in terms of the type and rating of the bonds they hold.  However, they will try to outperform the index by adjusting the maturity and weighting of the bonds in their portfolio vs the index.  They do this based on where they think there is additional return to be had that the index is not capturing, like giving more weighting to corporate bonds with shorter maturities for example.

Some funds, like the popular PIMCO Total Return fund will also hold high yield and bonds from countries outside of the US in their portfolio.  Even though they do not match the traditional definition of Core Bond funds which is to only hold US Investment Grade Bonds, these “non-core” investments normally make up a relatively small part of their portfolio.   They are therefore still considered to be core funds by most, however some categorize them as “Core-Plus” since they hold assets outside of the norm for the category.

If you are investing in a well established intermediate term core bond index fund then the performance from one fund to another should track closely.  For this reason your primary concern will be minimizing fees.  With an expense ratio of .10% the Vanguard Total Bond Market Index Fund (Ticker: VBTLX) is a good place to start.  It is also the largest bond index mutual fund in the world.

If you are considering going with an active manager then it is important to realize that the performance of one actively managed core bond fund vs. another can vary widely.  While all core bond funds will have many things in common, how a portfolio manager weights their portfolio in different sectors of the market and among different maturities can have a large affect on performance.

For more information on bond mutual funds and ETFs visit the Bond Funds section here at Learn Bonds



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