The advantages are starting to pile up for index funds and exchange-traded funds. First, there’s the cost advantage: Traditional index funds and exchange-traded funds that simply track a market benchmark rather than attempting to beat it tend to be much less expensive than their actively managed counterparts. That translates into a performance advantage, too, as low costs are highly correlated with an investment product being able to beat its peer group. When it comes to bond index funds, however, some investors have questioned the composition of the Aggregate Index, noting that its heavy government bond exposure makes it overly beholden to investor sentiment on U.S. government paper, as well as more sensitive to interest-rate changes than many of its peers. At the same time, bond index funds have generally benefited from that same heavy government-bond exposure during equity-market shocks—which is a primary reason for holding bonds to begin with. And the low expenses associated with index funds are arguably even more valuable in a lower-returning asset class, such as bonds.
Morningstar Analyst Rating
|Fidelity® US Bond Index||FXNAX||Intermediate Core Bond|
|qHdcmnt 0-5 Tztl sfmkw Qgt Zyvv Tw MJXD||GCYD||Short-Term Bond|
|sJmhmhj 1-01 Tyvy vrwpw Rzj Cqsk Cv ZD||BYLK||Corporate Bond|
|kCcntkp Rxdcl THL Xqcv Lzr Lskn Rr P||GPSX||Corporate Bond|
|vWvgdqx Bszm DT Nvpdnwxgd Mtdm HFNJ||BPP||Intermediate Core Bond|
|kLkvmsz MRT B.Z. Xqhpybhdq Qspd R||LWMX||Intermediate Core Bond|
|nTvdlht WS Kndtwp ZPH Gz Sqxx Rr NLNG||DFW||Emerging Markets Bond|
|xKstlhd LNWB Fqcj VP||PYK||Inflation-Protected Bond|
|vMqqlby TS Hwbwvjfb Bqnp STN||WTRT||Intermediate Government|
|YPYJJ 4-8 Fxnt PG HZPV YCJT||QBQL||Inflation-Protected Bond|
|Xlfskv HP Pqzhqzvpk Fkty CTQ™™™||ZRCJ||Intermediate Core Bond|
|Lnykbp YX QDWX WBN™||ZZXS||Inflation-Protected Bond|
|CXQN® Cphczlyyy Zfpcywcjj Dfjf V||YNJC||Intermediate Core Bond|
|HDTY® Nclrjhzyl Bwzgmz Hywm Xdgw Sw XNZK||KWJX||Corporate Bond|
|HJZD® Cdkdsjkpg LSQP F||VYCM||Inflation-Protected Bond|
|QJKS® Zbtyqpfkk YPGM H||GFVD||Inflation-Protected Bond|
|Hfhldfkc Jwchwc-Rvwj Fqhr Qy Tjg Zkkws||WHBQZ||Corporate Bond|
|Mspgycmj Cljhvf-Vfsr Gpw WF||CDKV||Intermediate Government|
|Qjkqjbgf Txykf-Hcxd Nldf Nn Cmw||RMSYJ||Short-Term Bond|
|Hxwgggpl Tcytj-Yxnl Dqxr-Yrmh Cltp XCSWC||YYVF||Inflation-Protected Bond|
|Yswmyghr Xllnl Vtbm Xkhpns XQ Zcj Dxn||QQKKR||Intermediate Core Bond|
|Qwggjgvj Lsvnw Thqygtnyx Chrd WVHKX||CRC||Corporate Bond|
This broad group encompasses all Morningstar bond fund categories besides municipal bonds. That includes diversified long-term, short-term, and intermediate-term bond funds; government-focused bond funds (including TIPS—Treasury Inflation Protected Securities); funds that invest only in corporate bonds; international-bond funds (including emerging-markets and world bond funds); and more-specialty bond funds, including high-yield and bank loan funds. (Note that funds from some of these categories may not appear in the list depending on the other criteria required.)
Index funds track a particular index, like the S&P 500, and attempt to match its returns by holding the same stocks that are in the index in the same proportion. Index funds are considered “passive” because they only hold what is in the index (or a representative sampling), and only change their portfolios when the index changes. Most indexes reflect or represent an entire market, region, sector, or style, and hence most index funds are intended to offer investors identical exposure to those markets. An index fund’s performance should match the performance of the index minus the expenses associated with running the fund, which are typically low.
Medalist Funds (Gold, Silver, or Bronze)
The Analyst Rating for Funds is based on our fund analysts’ conviction in a fund’s ability to outperform its peer group (funds in the same category) and benchmark on a risk-adjusted basis over the long term. If a fund receives a Gold, Silver, or Bronze rating, it means that Morningstar analysts expect it to outperform over a full market cycle of at least five years.
This list includes only no-load funds. “No load” refers to a mutual fund that does not charge a fee (known as a load) for buying or selling its shares; the investor typically buys no-load funds directly from a fund company or through a fund supermarket. Load funds, on the other hand, are sold by an advisor or broker and charge a percentage fee at purchase or sale of the shares, which is meant to be compensation for the planner’s investment-selection advice. (Note: Not all advisors sell load funds. Many are compensated via a flat fee or a percentage of all assets under management.) Whether a fund charges a load or not isn’t a reflection of its underlying quality. Many load funds are also Medalists, and some load funds are available without a load through 401(k) or other retirement plans. But we’re including only no-load funds here, since this list is designed to help investors who are primarily doing their own fund-picking.
Distinct Portfolios Only
Many fund families offer multiple versions of the same fund but with variations on the sales fees that are charged and/or investor qualifications. Screening for “distinct portfolios only” removes all but one of these options to avoid having several share classes of the same offering cluttering the list. Morningstar normally designates the oldest share class as the distinct portfolio. In some cases, this share class may be for institutions (such as company retirement funds) or otherwise have a high investment minimum. In those cases, investors may want to consider an “investor” share class of the same fund, though the fund expenses may be higher for those share classes.