Corporate bond mutual funds offer investors access to corporate bonds issued by private companies without the transaction fees involved in directly investing in the underlying bonds. The default risk profiles of these funds vary depending on whether the majority of the bonds they invest in are investment grade or non-investment grade. Some of the top corporate bond mutual funds include Delaware Extended Duration Bond Fund Class C (DEECX), Fidelity Corporate Bond Fund (FCBFX), Calvert Long-Term Income Fund Class A (CLDAX), and Lord Abbett Income A (LAGVX).
Basics
Corporate bond mutual funds allocate their investments to bonds issued by private sector firms. These fixed-income securities offer periodic interest payments and return the principal amount upon maturity. The spectrum of returns is shaped by the variety of corporate bonds, including investment-grade and non-investment-grade options, each carrying distinct levels of default risk.
Corporate bond mutual funds offer investors a hassle-free way to access fixed-income securities, saving them both time and transaction costs associated with purchasing individual bonds. In late 2018, Moody's Seasoned AAA Corporate Bond Yield data reported an average yield of 4.25% for investment-grade corporate bonds. This marked a significant uptick from the 3.51% average yield in 2017.
Here are five noteworthy corporate bond mutual funds for your consideration.
Delaware Extended Duration Bond Fund Class C
Delaware Extended Duration Bond Fund Class C (DEECX), established on September 15, 1998, is under the management of Delaware Investments, which operates within the Macquarie Group. DEECX directs at least 80% of its net assets toward investment-grade, long-term corporate bonds. Government and municipal bonds constitute 3.4% and 3.28% of the fund's portfolio, respectively.
DEECX's bond portfolio consists of securities rated BBB- and higher by Standard & Poor's, or Baa3 and higher by Moody's credit agency. Within its holdings of 182 securities, DEECX includes corporate bonds issued by prominent companies such as JPMorgan Chase, Pepsico, and Duke Energy.
Due to its extended duration of 13.4 years, the fund exhibits heightened sensitivity to fluctuations in market interest rates. As of April 30, 2020, DEECX maintained a two-star rating from Morningstar, along with a 1.57% expense ratio and a year-to-date return (YTD) of 21.76% for 2019. Investors seeking exposure to top-rated corporate bonds and who are at ease with interest rate risk and volatility tend to favor this fund.
Fidelity's FCBFX: A Diverse Investment Portfolio
Fidelity's Corporate Bond Fund (FCBFX) predominantly allocates over 80% of its resources to investment-grade corporate bonds from both domestic and foreign markets. These bonds exhibit interest rate risk profiles akin to the Barclays U.S. Credit Bond Index. The fund strategically diversifies its remaining assets across government bonds and cash holdings. FCBFX's portfolio is anchored by notable issuances from renowned institutions such as Morgan Stanley, Verizon, and Bank of America.
In contrast to DEECX, this fund maintains a portfolio primarily consisting of corporate bonds with shorter maturities, averaging 6.9 years. This strategic choice minimizes sensitivity to interest rate fluctuations, reducing volatility, albeit with slightly moderated returns.
As of May 31, 2020, FCBFX achieved a four-star rating from Morningstar, coupled with a 0.45% expense ratio and a 14.46% year-to-date return for 2019. This fund is particularly well-suited for investors seeking exposure to investment-grade corporate bonds with shorter durations and reduced interest rate risk sensitivity.
CLDAX: Striving for Optimal Returns
Under the banner of the Calvert Long-Term Income Fund Class A (CLDAX), the primary objective is to optimize returns through strategic investment in U.S. dollar-denominated bonds. These bonds encompass a range of categories, including corporate, government, and municipal, all characterized by their investment-grade credit quality.
In contrast to its peers, CLDAX displays a heavier focus on corporate bonds, representing approximately 81% of its portfolio. The remaining assets are diversified across U.S. government bonds (8.3%), securitized obligations (4%), and a combination of cash and municipal bonds. Notably, nearly 16% of the fund's assets are invested in a single U.S. government bond set to mature in 2045.
As of April 30, 2020, CLDAX received a two-star rating from Morningstar, with a 0.92% expense ratio and an impressive 20.76% year-to-date return for 2019. This fund is ideally suited for investors aiming to minimize default risk by including U.S. government bonds in their portfolio.
ISHIX: Diverse Holdings in Federated Bond Fund Class F Shares
Under the ticker ISHIX, the Federated Bond Fund Class F Shares diversify across investment-grade and non-investment-grade corporate bonds. Corporate bonds comprise 75% of the fund's holdings, while government obligations constitute a minimal fraction, accounting for less than 5% of its assets.
With 24% of its portfolio dedicated to high-yield bonds and the majority, 75%, focused on investment-grade bonds, ISHIX demonstrates a diversified investment approach. The presence of speculative-grade bonds entails a higher default risk, but in favorable market conditions, this fund can surpass its peers in terms of performance.
As of May 5, 2020, ISHIX boasted a three-star rating from Morningstar, accompanied by a 0.86% expense ratio and a 13.85% year-to-date return. This fund caters to investors interested in a blend of investment-grade and speculative bonds, aiming for potential high returns in favorable bond market conditions.
In cases of default risk uncertainty, it's essential to remember that, as a general rule, bonds with extended maturities tend to exhibit heightened price volatility.
LAGVX: Lord Abbett Income A's Bond Strategy
Within the Lord Abbett Income A mutual fund (LAGVX), investments encompass both investment-grade and high-yield corporate bonds, with a pronounced focus on the lower end of the investment-grade spectrum. Approximately 68% of the fund's assets are directed toward corporate bonds, while securitized fixed-income instruments account for roughly 15% of the portfolio.
As of May 31, 2020, LAGVX secured a three-star rating from Morningstar, along with a 0.77% expense ratio and a 12.92% year-to-date return for 2019. This fund suits investors aiming to broaden their portfolio with high-yield bonds concentrated on investment-grade issues holding BBB credit quality ratings.
Conclusion
Corporate bond mutual funds provide investors with a hassle-free way to diversify their portfolios with corporate bonds. The choice between investment-grade and non-investment-grade bonds within these funds impacts default risk. Notable options include DEECX, FCBFX, CLDAX, ISHIX, and LAGVX, each offering different risk profiles to match varying investor preferences and goals. It's crucial for investors to assess their risk tolerance and objectives when considering these funds as part of their investment strategy.