There are a lot of different bond funds available to investors. But, are they the same or are they really different? Morningstar broke down bond funds into four (4) major categories (sure, there are more, but this is a good start). The four (4) bond categories are as follows:

Intermediate Core

• Invests primarily in investment-grade U.S. fixed income issues including government, corporate, and securitized debt.

• Holds less than 5% in below-investment-grade exposures.

Intermediate Core-Plus

• Invests primarily in investment-grade U.S. fixed income issues including government, corporate, and securitized debt.

• Has greater flexibility than core offerings to hold non-core sectors such as corporate high-yield, bank loan, emerging markets debt, and non-U.S. currency exposures.

Multi-sector

• Seeks income by diversifying their assets among several fixed-income sectors, usually U.S. government obligations, U.S. corporate bonds, foreign bonds, and high-yield U.S. debt securities.

• Typically holds 35% to 65% of their assets in securities that are not rated or are rated BB and below by a major agency such as Standard & Poor's or Moody's Investors Service.

Nontraditional

• Seeks returns uncorrelated with those of the overall bond market.

• Has the flexibility to invest tactically across a wide swath of individual sectors, including high-yield and foreign debt, in addition to the potential for significant usage of derivatives.

It goes without saying that most individuals would do best if they placed the majority (if not the vast majority) of their bond portfolio holdings within an Intermediate Core Bond Fund. This type of bond fund generally exhibits a correlation that protects investors during a down stock market - as noted below by the graphic from Morningstar about bond fund correlations with the S&P 500 Index. Please also note that a correlation value of 1.00 means the fund perfectly matches the S&P 500 Index, while a correlation value of 0.00 means there is no correlation and a correlation value of -1.00 means they are inversely correlated (as one goes down, the other goes up).

Ten-year return correlation of Morningstar bond categories with the S&P 500 Index

S&P 500 Index 1.00

U.S. High-Yield Bond 0.72

U.S. Nontraditional Bond 0.50

U.S. Multisector Bond 0.56

U.S. Intermediate Core-Plus Bond 0.15

U.S. Intermediate Core Bond –0.03

Sources: Vanguard and Morningstar, Inc. as of July 31, 2019.

So, the next time you are thinking about stretching out on the yield curve to obtain a little more return from you bond fund portfolio, don’t forget why you invested in bonds in the first place (to smooth out the ride of your investment returns over your portfolio’s lifespan).

To learn more about dividend paying stocks versus bonds, see my earlier post (Dividend Paying Stocks versus Bonds).

If you have questions about how to invest your bond portfolio, please feel free to contact Intelligent Investing at www.mynmfp.com/new-clients for a no-obligation consultation.

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David L. Hogans, Esq. is an author and the founder of Intelligent Investing, Inc., a registered investment advisor firm located in Albuquerque, NM.  He earned his Bachelor of Science in Chemical Engineering (ChE) from Virginia Tech and his Juris Doctorate (JD) from the University of Dayton.  Mr. Hogans is licensed to practice law in the states of Virginia and New Mexico, as well as, before the Federal Patent Bar.  For more information about Mr. Hogans and his firm please see his filing with the Securities and Exchange Commission (SEC) (https://files.adviserinfo.sec.gov/IAPD/Content/Common/crd_iapd_Brochure.aspx?BRCHR_VRSN_ID=602988).