The top 14 low cost taxable United States bond mutual funds, when you need a low minimum deposit
This “top 10 + 4” article discusses the top 14 low cost taxable US fixed income funds, with low minimum deposits. In this article, we consider taxable bond funds with a $10,000 maximum initial deposit for a taxable account. Required minimum deposits in the list below are $3,000 for the 13 Vanguard bond funds and $10,000 for the Fidelity fund. The primary objective of this article is to identify low cost taxable bond funds, because low investment management fees are very important when selecting fixed income funds. This article will explain why.
Now, if you are one of those high savers who has been socking money away for a long time, you might have $100,000 or more to invest in a low cost bond fund. If you have a hundred grand for a single taxable bond investment fund, then you can buy a bond mutual fund with an even lower investment management expense ratio. We have also written a United States bond article that lists the Top 11 Lowest Cost Taxable US Fixed Income Mutual Funds, if you can make the higher minimum deposit of over $100,000.
When you review the bond funds list below, you will immediately notice that, except for a single fund offered by Fidelity, every other fund is offered by The Vanguard Group mutual fund company. This is not surprising, because Vanguard’s long term business strategy has been to offer the best bond market index funds at the lowest costs. Vanguard dominates this low cost United States bond mutual funds marketplace for direct purchase accounts with both low and high minimum deposits.
What is important when you buy taxable bond funds?
Investment research overwhelmingly shows that lower cost fixed income funds tend to yield higher bond investing returns. The fixed income asset market is no place for you to try to beat the market and to attempt to get higher returns by active bond investing. Even professional fixed income asset market money managers do not beat the bond market. The higher the mutual fund company expenses, the lower the net returns to individual investors.
Professional fixed income asset market money managers do not achieve high enough returns to cover their higher fees. As a result, these higher costs cause you to get inferior net returns. You pay more. You get less.
Read this article to understand why paying higher bond mutual fund fees will most often create a “deadweight” loss for you: Bond Mutual Fund Fees. This article about the high investment management costs of fixed income funds summarizes three studies. All three of these cost evaluation studies about United States bond mutual funds clearly show that the more you pay for bond funds, the less you tend to get.
Our sister website, Best NoLoad Mutual Funds, provides an explanation of 7 factors that can help you to choose the best mutual funds and ETFs. Click any of the numbered subheadings in that article to find another article about that each selection factor for choosing bond market index funds.
Regarding choosing bond funds from a fixed income asset market mutual fund company, the process of picking fixed income funds can be even more straightforward. We also have additional articles about investing in fixed income funds and bond ETFs. These articles provide more detailed explanations of why you get less with bond funds that have higher management expense ratios. See these articles: No Load Bond Funds, Bond Mutual Fund Fees, and Bond Index Funds.
The list of the top 14 low cost taxable United States bond mutual funds with initial investments at or below $10,000
We have ordered the table of low cost United States bond mutual funds below by increasing annual management expense ratio. However, all these bond funds have management expense ratios that are very low. When investing in fixed income funds you need to decide the type of bond fund by bond quality (default risk) and bond duration. Bond duration is the weighted average of the expected cash flows for the bonds in the portfolio.
In addition to default risk and bond duration, lower bond mutual fund fees have been shown to have a significant impact on expected bond yields. Note also that the average bond duration for these bond funds will influence their rates of portfolio turnover. Over 90% of the portfolio assets of these funds are invested in bonds and fixed income securities. Most have very close to 100% of their assets in bond securities. All these funds were believed to be open to new investors at the time of writing.
Concerning annualized 3-year investment returns, it is not be appropriate to compare returns across this list of the top 14 low cost United States bond mutual funds. Due to the mixture of bond durations and other factors, this would be an apples and oranges comparison. Furthermore, the credit crunch related to the subprime mortgage crisis and the collapse of the housing bubble caused a flight to insured government bonds funds, which negatively affected prices of other non-insured bonds of varying credit quality.
The top 14 low cost United States taxable bond mutual funds with initial deposit requirements at or below $10,000
See the notes at the bottom of this table.*
#1) Vanguard Long Term Bond Index Fund – Investor Shares Class – VBLTX
Annual Management Expense Ratio _____0.19%
Annual Portfolio Turnover _____________67%
Total Portfolio Assets ($B) _____________$2.8
Taxable Account Minimum Investment ____$3,000
#2) Vanguard Short Term Bond Index Fund – Investor Shares Class – VBISX
Annual Management Expense Ratio _____0.19%
Annual Portfolio Turnover _____________101%
Total Portfolio Assets ($B) _____________$10.5
Taxable Account Minimum Investment ____$3,000
#3) Vanguard Intermediate Term Bond Index Fund – Investor Shares Class – VBIIX
Annual Management Expense Ratio _____0.18%
Annual Portfolio Turnover _____________86%
Total Portfolio Assets ($B) _____________$3.2
Taxable Account Minimum Investment ____$3,000
#4) Vanguard Short Term Federal Fund – Investor Shares Class – VSGBX
Annual Management Expense Ratio _____0.19%
Annual Portfolio Turnover _____________89%
Total Portfolio Assets ($B) _____________$8.6
Taxable Account Minimum Investment ____$3,000
#5) Vanguard Inflation-Protected Securities Fund – Investor Shares Class – VIPSX
Annual Management Expense Ratio _____0.20%
Annual Portfolio Turnover _____________28%
Total Portfolio Assets ($B) _____________$19.3
Taxable Account Minimum Investment ____$3,000
#6) Vanguard Total Bond Market Index Fund – Investor Shares Class – VBMFX
Annual Management Expense Ratio _____0.20%
Annual Portfolio Turnover _____________61%
Total Portfolio Assets ($B) _____________$54.0
Taxable Account Minimum Investment ____$3,000
#7) Fidelity Spartan Intermediate Treasury Bond Index Fund – Investor Class – FIBIX
Annual Management Expense Ratio _____0.20%
Annual Portfolio Turnover _____________85%
Total Portfolio Assets ($B) _____________$1.6
Taxable Account Minimum Investment ____$10,000
#8) Vanguard Short Term Investment Grade Fund – Investor Shares Class – VFSTX
Annual Management Expense Ratio _____0.21%
Annual Portfolio Turnover _____________49%
Total Portfolio Assets ($B) _____________$20.4
Taxable Account Minimum Investment ____$3,000
#9) Vanguard GNMA Fund – Investor Shares Class – VFIIX
Annual Management Expense Ratio _____0.21%
Annual Portfolio Turnover _____________63%
Total Portfolio Assets ($B) _____________$32.6
Taxable Account Minimum Investment ____$3,000
#10) Vanguard Intermediate Term Investment Grade Fund – Investor Shares Class – VFICX
Annual Management Expense Ratio _____0.21%
Annual Portfolio Turnover _____________48%
Total Portfolio Assets ($B) _____________$9.6
Taxable Account Minimum Investment ____$3,000
#11) Vanguard Long Term Investment Grade Fund – Investor Shares Class – VWESX
Annual Management Expense Ratio _____0.22%
Annual Portfolio Turnover _____________24%
Total Portfolio Assets ($B) _____________$5.8
Taxable Account Minimum Investment ____$3,000
#12) Vanguard High Yield Corporate Fund – Investor Shares Class – VWEHX
(See the note below.)
Annual Management Expense Ratio _____0.21%
Annual Portfolio Turnover _____________47%
Total Portfolio Assets ($B) _____________$8.0
Taxable Account Minimum Investment ____$3,000
#13) Vanguard Long Term Treasury Fund – Investor Shares Class – VUSTX
Annual Management Expense Ratio _____0.26%
Annual Portfolio Turnover _____________80%
Total Portfolio Assets ($B) _____________$3.4
Taxable Account Minimum Investment ____$3,000
#14) Vanguard Intermediate Term Treasury Fund – Investor Shares Class – VFITX
Annual Management Expense Ratio _____0.26%
Annual Portfolio Turnover _____________88%
Total Portfolio Assets ($B) _____________$7.1
Taxable Account Minimum Investment ____$3,000
Note on #12 VWEHX: This United States bond mutual funds charges a 1% fee on the sale of shares held under one year. This redemption fee is paid to the fund and benefits the fund’s remaining shareholders. Thus, it is not a back end load.
Notes about this list:
1) You can just buy index funds directly from an mutual fund company that wants direct relationships with the investing public. You do not have to waste your hard-earned money on the sales loads and 12b-1 fees that deplete your investment assets, when you buy through a financial advisor or investment counselor. Because all but one of these top 14 low cost United States bond mutual funds are offered by Vanguard, we have not provided links above to the specific funds. Instead, use these links to find these funds on the Vanguard website:
- Vanguard Funds by Asset Class. Change the Share Class in the pull down menu to Admiral Shares. Click the name of the bond fund and verify the ticker symbol.
- Vanguard main website for individual investors
- To find the main Fidelity Investments website, click on this link: Fidelity Investments. To find a particular mutual fund, enter the funds ticker symbol in the search box at the top of the page.
2) This list of the top 14 low cost United States bond mutual funds was developed using data base screening methods, which excluded United States bond mutual funds that did not meet the selection criteria. No analysis or due diligence of any kind was performed on any of these top 14 low cost United States bond mutual funds. This list of top 14 low cost United States bond mutual funds is solely for your information and is not investment advice or a solicitation or offer to sell securities or other financial services. There could be errors with this information, and it is your responsibility to verify all information, before you make any personal financial decision.
How this list of the top 14 low cost taxable United States bond mutual funds was developed
To develop this list we used the screening methods described below and applied them to data from early in Q2 of 2009. We have found that lists of low cost investment mutual funds and ETFs developed using these screening methods tend to be quite stable over time. Things may have changed since this article was written, and you should always verify information before investing.
The reasons are quite simple why a list like this tends to be relatively stable. If an mutual fund company competes on price, it keeps competing on price. If it offers low turnover, low fee, passively managed index mutual funds, it tends to keep offering the same.
The top 14 low cost United States bond mutual funds in the list below were selected using a process of elimination following the Best No Load Funds selection criteria. As a starting point the universe of potential United States bond mutual funds was obtained using data from Lipper and/or Morningstar. United States bond mutual funds include US Treasury, US Agency, GNMA, and corporate debt obligations – all with a range of durations and quality.
This universe of mutual funds and ETFs was then automatically screened according to these fund selection rules:
- No charges for 12b1 fees and mutual fund sales loads. (None of these fixed income funds have financial advisor sales load charges nor any 12b1 fees.),
- Lower investment management expenses (All have extremely low asset management fees),
- Lower portfolio turnover (Turnover is low to moderate for most of these funds. Shorter duration pushes up turnover and the credit crunch has also had an impact.),
- Avoid very large actively managed mutual funds (None seemed to be, although FIBIX seemed to be modestly leveraged.),
- Avoid very new mutual funds (All funds are at least three years old, except the FIBIX fund, which was about 2.5 year old at the time of writing.),
- Eliminate very small mutual funds (All funds have at least $.5B in portfolio value.), and
- Screen out inferior ETF and mutual fund performance (None had consistently inferior 1-year, 3-year, and 5-year performance. Most had investment performance in the upper quartile of their comparison group, although several had some difficulties largely due to the credit crunch and monetary policy.)
With these selection criteria, you inevitably end up with a much smaller list of mutual funds and ETFs. Remaining investment funds are almost inevitably passively managed index funds, because low cost structures cannot support the investment management activities required to pursue more risky, active strategies.
In addition, the resulting list is quite small relative to the very large universe of mutual funds and exchange traded funds that we began with. This is simply because the vast majority of investment funds are actively managed funds, which are far more likely to make money for the mutual fund company, than they are to make money for you. See this article on our sister website, The Skilled Investor, The illusion of superior professional mutual fund manager performance.
When you screen investment funds in almost any investment asset category and rank them from lower to greater investment management ratios, the resulting investment fund lists tend to be populated by funds from a handful of investment management companies. An mutual fund company sets its business strategy, and some (too few) of them have decided to compete on the basis of low costs and efficiency. These low cost investment fund companies tend to do a better job of serving the interests of individual investors.
