Best Bond Funds | Top 11 Low Cost US Taxable Fixed Income Mutual Funds, Higher Minimum Deposit



Top 11 Low Cost US Taxable Fixed Income Mutual Funds, Higher Minimum Deposit

The top 11 low cost taxable U.S. fixed income mutual funds, when you have $100,000 to invest

This “top 10 + 1″ article discusses the top 11 low cost US taxable bond mutual funds, if you have $100,000 to invest. Now, you say that you do not have a hundred grand for a single bond market investment fund? Well, all is not lost for you (and for most other people). Elsewhere on this bond index funds website, we have published a US bond article that lists the Top 14 Low Cost Taxable US Bond Mutual Funds that have much lower initial contribution requirements. This other taxable US bond article covers taxable US fixed income mutual funds that require much lower initial investments for taxable fixed income funds.

When you review the taxable fixed income funds list below, you will immediately notice that every fund is offered by The Vanguard Group investment company. This is not surprising, because Vanguard’s long term business strategy has been to offer the best index mutual funds at the lowest costs. Vanguard dominates this low cost US fixed income mutual funds marketplace.

What is important when you buy taxable fixed income funds?

Most importantly, the investment research literature indicates that lower cost bond mutual funds tend to yield higher fixed income investing returns. The bond market is no place for an individual investor to try to beat the market and get higher returns through attempts at clever fixed income investing. Even professional bond market money managers do not beat the bond market. The higher their fund charges, the further they fall behind.

The failure of professional bond market money managers to deliver higher returns to justify their higher fees is thoroughly documented in the research literature. To better understand why paying higher bond mutual fund fees creates a “deadweight” loss to individual investors, see this Bond Mutual Fund Fees article elsewhere on this website. This article about the unjustifiably high investment management costs of bond mutual funds summarizes three studies. All three of these cost evaluation studies about US fixed income mutual funds clearly show that the more you pay for fixed income funds, the less you get.

Our sister website, Best NoLoad Mutual Funds, provides some scientific criteria for selecting the best mutual funds and ETFs. Click any of the numbered subheadings in that article, and you will find a more detailed article about that particular selection criteria for choosing index mutual funds.

Regarding selecting fixed income funds from a bond market investment company, the process of choosing bond mutual funds can be even more straightforward. On this website, you will find additional articles about investing in bond mutual funds and bond ETFs. These articles indicate that the more you pay when you buy fixed income funds, the less you get. See these articles: No Load Bond Funds, Bond Mutual Fund Fees, and Bond Index Funds.

The list of the top 11 low cost taxable US fixed income mutual funds, when you have $100,000 to invest

The table of low cost taxable US fixed income mutual funds below is arranged by increasing annual management expense ratio. However, all these fixed income funds have management expense ratios that are very low. When investing in bond mutual funds you need to decide the type of bond fund by bond quality (default risk) and bond duration. Bond duration is the weighted average of the expected cash flows for the bonds in the portfolio.

In addition to default risk and bond duration, lower bond mutual fund fees have been shown to have a significant impact on expected bond yields. Note also that the average bond duration for these fixed income funds will influence their rates of portfolio turnover. Over 90% of the bond portfolio assets of these funds invested in bonds and fixed income securities. Most have very close to 100% of their assets in long bond secuities. All these funds were believed to be open to new investors at the time of writing.

With annualized 3-year investment returns, it would not be appropriate to compare returns across this list of the top 11 low cost US fixed income mutual funds. Such a comparison would be an apples and oranges comparison, due to the mixture of bond durations and other factors. Furthermore, the credit crunch related to the subprime mortgage crisis and the collapse of the housing bubble caused a flight to insured government bonds funds, which negatively affected prices of other non-insured bonds of varying credit quality.

See the notes at the bottom of this table.*

#1) Vanguard Long Term Treasury Fund – Admiral Share Class – VUSUX

Annual Management Expense Ratio _____0.10%
Annual Portfolio Turnover _____________80%
Total Portfolio Assets ($B) _____________$3.4
Taxable Account Minimum Investment ____$100,000

#2) Vanguard Short Term Federal Fund – Admiral Share Class – VSGDX

Annual Management Expense Ratio _____0.10%
Annual Portfolio Turnover _____________109%
Total Portfolio Assets ($B) _____________$4.0
Taxable Account Minimum Investment ____$100,000

#3) Vanguard Short Term Investment Grade – Admiral Share Class – VFSUX

Annual Management Expense Ratio _____0.10%
Annual Portfolio Turnover _____________49%
Total Portfolio Assets ($B) _____________$20.4
Taxable Account Minimum Investment ____$100,000

#4) Vanguard Intermediate Term Treasury Fund – Admiral Share Class – VFIUX

Annual Management Expense Ratio _____0.10%
Annual Portfolio Turnover _____________88%
Total Portfolio Assets ($B) _____________$7.1
Taxable Account Minimum Investment ____$100,000

#5) Vanguard Intermediate Term Investment Grade – Admiral Share Class – VFIDX

Annual Management Expense Ratio _____0.10%
Annual Portfolio Turnover _____________48%
Total Portfolio Assets ($B) _____________$9.6
Taxable Account Minimum Investment ____$100,000

#6) Vanguard GNMA Fund – Admiral Share Class – VFIJX

Annual Management Expense Ratio _____0.11%
Annual Portfolio Turnover _____________63%
Total Portfolio Assets ($B) _____________$32.6
Taxable Account Minimum Investment ____$100,000

#7) Vanguard Total Bond Market Index Fund – Admiral Share Class – VBTLX

Annual Management Expense Ratio _____0.11%
Annual Portfolio Turnover _____________61%
Total Portfolio Assets ($B) _____________$54.0
Taxable Account Minimum Investment ____$100,000

#8) Vanguard Short-Term Bond Index Fund – Admiral Share Class – VBIRX

Annual Management Expense Ratio _____0.11%
Annual Portfolio Turnover _____________101%
Total Portfolio Assets ($B) _____________$10.5
Taxable Account Minimum Investment ____$100,000

#9) Vanguard Intermediate Term Bond Index Fund – Admiral Share Class – VBILX

Annual Management Expense Ratio _____0.11%
Annual Portfolio Turnover _____________89%
Total Portfolio Assets ($B) _____________$8.6
Taxable Account Minimum Investment ____$100,000

#10) Vanguard Long Term Investment Grade Fund – Admiral Share Class – VWETX

Annual Management Expense Ratio _____0.12%
Annual Portfolio Turnover _____________24%
Total Portfolio Assets ($B) _____________$5.8
Taxable Account Minimum Investment ____$100,000

#11) Vanguard High Yield Corporate Fund – Admiral Share Class – VWEAX

(see note below)

Annual Management Expense Ratio _____0.13%
Annual Portfolio Turnover _____________21%
Total Portfolio Assets ($B) _____________$8.0
Taxable Account Minimum Investment ____$100,000

Note on #11 VWEAX: This US fixed income mutual funds charges a 1% redemption fee on the sale of shares held under one year. This redemption fee is paid to the fund’s remaining shareholders, and thus it is not a back end load.

Notes about this list:
1) You can just buy index funds directly from an investment company that wants direct relationships with the investing public. You do not have to waste your hard-earned money on the sales loads and 12b-1 fees that deplete your investment assets, when you buy through a financial advisor or investment counselor. Because all of these top 11 low cost US fixed income mutual funds are offered by Vanguard, we have not provided links above to the specific funds. Instead, use these links to find these funds on the Vanguard website:

2) This list of the top 11 low cost US fixed income mutual funds was developed using data base screening methods, which excluded US fixed income mutual funds that did not meet the selection criteria. No analysis or due diligence of any kind was performed on any of these top 11 low cost US fixed income mutual funds. This list of top 11 low cost US fixed income mutual funds is solely for your information and is not investment advice or a solicitation or offer to sell securities or other financial services. There could be errors with this information, and it is your responsibility to verify all information, before you make any personal financial decision.

How this list of the top 11 low cost taxable US fixed income mutual funds was developed

To develop this list we used the screening methods described below and applied them to data from early in Q2 of 2009. We have found that lists of low cost investment mutual funds and ETFs developed using these screening methods tend to be quite stable over time. Things may have changed since this article was written, and you should always verify information before investing.

The reasons are quite simple why a list like this tends to be relatively stable. If an investment company competes on price, it keeps competing on price. If it offers low turnover, low fee, passively managed index mutual funds, it tends to keep offering the same.

The top 11 low cost US fixed income mutual funds in the list below were selected using a process of elimination following the Best No Load Funds selection criteria. As a starting point the universe of potential US fixed income mutual funds was obtained using data from Lipper and/or Morningstar. US fixed income mutual funds include US Treasury, US Agency, GNMA, and corporate debt obligations – all with a range of durations and quality.

This universe of mutual funds and ETFs was then automatically screened according to these fund selection rules:

  • No charges for 12b1 fees and mutual fund sales loads. (None of these bond mutual funds have financial advisor sales load charges nor any 12b1 fees.),
  • Lower investment management expenses (All have extremely low asset management fees),
  • Lower portfolio turnover (Turnover is low to moderate for most of these funds. Shorter duration pushes up turnover and the credit crunch has also had an impact.),
  • Avoid very large actively managed mutual funds (None are.),
  • Avoid very new mutual funds (All funds are at least three years old.),
  • Eliminate very small mutual funds (All funds have at least $.5B in portfolio assets.), and
  • Screen out inferior ETF and mutual fund performance (None had consistently inferior 1-year, 3-year, and 5-year performance. Most had investment performance in the upper quartile of their comparison group, although several had some difficulties due in part to the credit crunch and changes in monetary policy.)

With these selection criteria, you inevitably end up with a much smaller list of mutual funds and ETFs. Remaining investment funds are almost inevitably passively managed index funds, because low cost structures cannot support the investment management activities required to pursue more risky, active strategies.

In addition, the resulting list is quite small relative to the very large universe of mutual funds and exchange traded funds that we began with. This is simply because the vast majority of investment funds are actively managed funds, which are far more likely to make money for the investment company, than they are to make money for you. See this article on our sister website, The Skilled Investor, The illusion of superior professional mutual fund manager performance.

When you screen investment funds in almost any investment asset category and rank them from lower to greater investment management ratios, the resulting investment fund lists tend to be populated by funds from a handful of investment management companies. An investment company sets its business strategy, and some (too few) of them have decided to compete on the basis of low costs and efficiency. These low cost investment fund companies tend to do a better job of serving the interests of individual investors.

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