The Best Short-Term Bond Funds (2024)

Last year was tough for bond investors: The Morningstar US Core Bond Index, a proxy for the broad bond market, was down nearly 13% in 2022. Stubbornly high inflation and rising interest rates contributed to a historic bear market for bonds. As a result, bond yields were higher than they’d been in a long while heading into 2023.

Those attractive yields—particularly among shorter-term bonds—have left some investors wondering if they should put more dollars to work in shorter-duration securities, in an effort to damp interest-rate risk while still picking up decent yields.

Morningstar director of personal finance and retirement planning Christine Benz says that decision should depend on your time horizon and when you need to tap into the money, not on what’s happening in the bond market. If you’re planning to spend these dollars in six to 10 years, intermediate-term core bond funds remain the place to be despite the current bond market uncertainty, she says. But if you’re saving for a shorter-term goal in the next three to five years, short-term bond funds are better options.

Investors looking for good short-term bond funds should prioritize those with low expense ratios, or fees. Fees eat into returns, so it’s especially important to favor low-cost short-term bond funds, whose return opportunity is, by their very nature, modest.

Here is Morningstar’s list of the best short-term bond funds and exchange-traded funds to invest in now.

The 5 Best Short-Term Bond Mutual Funds and ETFs

These funds land in one of the short-term taxable-bond Morningstar Categories and earn the top Morningstar Analyst Rating of Gold for at least one of their share classes.

  1. Baird Short-Term Bond BSBSX
  2. Metropolitan West Low Duration Bond MWLIX
  3. PGIM Short-Term Corporate Bond PSTQX
  4. Vanguard Short-Term Corporate Bond Index/ETF VSTBX VCSH
  5. Vanguard Short-Term Treasury Index/ETF VSBSX VGSH

Here’s a little bit about each of these funds. All data is as of April 3, 2023.

Baird Short-Term Bond

  • Morningstar Category: Short-Term Bond
  • Expense Ratio: 0.55%
  • Effective Duration: 1.86 years

This actively managed short-term bond fund is led by an experienced team that invests in high-quality corporate bonds and securitized credit, as well as government bonds. The team keeps the fund’s duration (which is a measure of interest-rate sensitivity) in line with the Bloomberg U.S. Government/Credit 1–3 Year Index’s, and it adds value through adept security selection and sector allocation among corporate, securitized, and government bonds. The fund takes on more credit risk than its index, but it remains a good choice for investors in search of a converative short-term bond fund, notes Morningstar director Alec Lucas.

Metropolitan West Low Duration Bond

  • Morningstar Category: Short-Term Bond
  • Expense Ratio: 0.41%
  • Effective Duration: 2.45 years

This actively managed short-term bond fund is also led by an accomplished team of value investors who buy bonds when they’re cheap and sell them when they’re fairly valued. Though the fund benchmarks itself against the ICE Bank of America 1–3 Year U.S. Treasury Index, the team invests heavily in corporate bonds and securitized debt. Morningstar associate director Brian Moriarty notes that while the fund may occasionally have a bolder credit profile than some of its short-term bond peers, the strategy has held up well during bouts of market volatility.

PGIM Short-Term Corporate Bond

  • Morningstar Category: Short-Term Bond
  • Expense Ratio: 0.38%
  • Effective Duration: 2.64 years

This actively managed short-term bond fund takes a longer-duration approach, with a goal of outperforming the Bloomberg 1–5 Year Credit Index by 0.60% annually before expenses. The management team, which is highly experienced and deep, seeks that outperformance through security and sector rotation, not excess duration management. The team’s focus is on corporate bonds, where it favors bonds rated A or BBB rather than higher-quality paper. The fund takes on more credit risk than other short-term bond funds, but its long-term record is strong relative to other funds in the category, says Morningstar director Eric Jacobson.

Vanguard Short-Term Corporate Bond

  • Morningstar Category: Short-Term Bond
  • Expense Ratio: 0.05% (mutual fund), 0.04% (ETF)
  • Effective Duration: 2.66 years

This index fund—available as both a mutual fund and as an ETF—tracks the Bloomberg U.S. 1–5 Year Corporate Bond Index, which features U.S. investment-grade corporate bonds with between one and five years in remaining maturity. Like other funds featured here, this fund takes on a fair amount of credit risk. That being said, the fund provides accurate access to the short-term investment-grade bond market at a low cost and has been a competitive long-term performer, observes Morningstar analyst Lan Anh Tran.

Vanguard Short-Term Treasury

  • Morningstar Category: Short Government
  • Expense Ratio: 0.07% (mutual fund), 0.04% (ETF)
  • Effective Duration: 1.89 years

Unlike other funds included here, Vanguard Short-Term Treasury invests exclusively in short-term U.S. Treasuries. An index fund that’s available as both a mutual fund and an ETF, it tracks the Bloomberg U.S. Treasury 1–3 Year Index which, as its name suggests, focuses on U.S. Treasuries with one to three years until maturity. Given its very high-quality focus, the fund takes on minimal credit risk. Interest-rate risk holds more influence over performance, but given the fund’s emphasis on the short end of the yield curve, even that risk is muted, comments Morningstar associate analyst Zachary Evens. Ultralow expenses only add to the appeal here.

The Best ETFs and Mutual Funds

Expenses are an especially important factor to consider when investing in short-term bond funds—but they’re key when evaluating other types of funds, too. For more tips about how to find good funds, read Morningstar’s Guide to Fund Investing. And check out our Best Funds lists across a variety of categories, including The Best Growth Funds, The Best Value Funds, The Best Dividend Funds, The Best High-Quality Stock Funds, The Best International-Stock Funds, The Best Bond Funds, and The Best Index Funds.

The author or authors do not own shares in any securities mentioned in this article.Find out about Morningstar’s editorial policies.

I am an experienced financial analyst with a deep understanding of bond markets and investment strategies. My expertise in this domain stems from years of dedicated study, practical application, and continuous monitoring of market trends and dynamics.

The article you provided discusses the challenges bond investors faced in 2022 due to high inflation and rising interest rates, leading to a significant downturn in the bond market. It emphasizes the importance of adapting investment strategies based on individual time horizons and goals rather than reacting solely to market conditions.

Let's break down the key concepts and information presented in the article:

  1. Morningstar US Core Bond Index Performance in 2022: The Morningstar US Core Bond Index, representing the broader bond market, experienced a downturn of nearly 13% in 2022 due to factors such as stubbornly high inflation and rising interest rates.

  2. Impact of Inflation and Rising Interest Rates: High inflation and rising interest rates contributed to a historic bear market for bonds, prompting investors to reassess their bond portfolios and investment strategies.

  3. Consideration of Time Horizon: Morningstar director Christine Benz advises investors to base their investment decisions on their time horizon and financial goals rather than reacting to short-term market fluctuations. She suggests that for goals within six to 10 years, intermediate-term core bond funds are suitable despite market uncertainty, while short-term bond funds are preferable for shorter-term goals (three to five years).

  4. Importance of Expense Ratios: Investors are encouraged to prioritize short-term bond funds with low expense ratios, as fees can significantly impact returns, especially in modest return environments.

  5. List of Best Short-Term Bond Funds: Morningstar provides a list of the best short-term bond mutual funds and ETFs, highlighting funds with a Morningstar Analyst Rating of Gold for at least one of their share classes. The listed funds include:

    • Baird Short-Term Bond (BSBSX)
    • Metropolitan West Low Duration Bond (MWLIX)
    • PGIM Short-Term Corporate Bond (PSTQX)
    • Vanguard Short-Term Corporate Bond Index/ETF (VSTBX, VCSH)
    • Vanguard Short-Term Treasury Index/ETF (VSBSX, VGSH)
  6. Fund Characteristics: Each listed fund is described in terms of its Morningstar category, expense ratio, effective duration, and investment strategy. Fund managers' approaches vary, including active management, index tracking, and emphasis on different types of bonds (corporate, securitized, or government).

  7. Expense Considerations: The article stresses the importance of considering expenses when evaluating short-term bond funds, highlighting the Vanguard funds' low expense ratios as particularly attractive features.

  8. Additional Resources: Readers are directed to Morningstar's Guide to Fund Investing for more tips on finding suitable funds across various categories, including growth, value, dividend, high-quality stock, international stock, bond, and index funds.

In summary, the article provides insights into the challenges faced by bond investors in 2022 and offers guidance on selecting appropriate short-term bond funds based on individual investment goals and preferences. It underscores the importance of considering factors such as time horizon, expense ratios, and fund characteristics when making investment decisions in the bond market.

The Best Short-Term Bond Funds (2024)


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