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Not Ready for High Yield? Try These Topnotch Bond Funds

These intermediate-term and multisector bond offerings hold a lot of appeal.

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The high-yield bond market's recent rally has been hard to ignore--the typical fund in this category has returned 19% for the year to date through May 29, 2009. That said, the category as a whole was down 26% in 2008, and technical factors including climbing default rates and potentially lower recovery rates for bankruptcies mean that the likelihood for continued volatility is high, and another high-yield sell-off is entirely possible if we don't see improvements in these areas.

So, investors not ready to add a pure high-yield offering to their portfolios would be better-served by sticking with an intermediate-term or multisector-bond fund. While these funds may offer some exposure to high-yield issues, they also offer more diversification in terms of credit quality. Creating a screen for topnotch funds in these categories is a snap with the Premium Screener. Simply screen for intermediate-term and multisector-bond funds that are open to new investment. We limited the results to funds that ranked in the top third of their categories over the past 10-year period, making sure that the current management teams were responsible for the outperformance. Lastly, we required that the funds have expense ratios that fall below the category average as well as investment minimums of $25,000 or less.

Here are some of the results as of May 29, 2009:

Karin Anderson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.