After 11 interest-rate increases by the Federal Reserve in the last two years, the yields on short-term investments certainly look compelling. Those attractive yields have left some investors wondering if they should put more dollars to work in short-term bonds while they are still paying decent yields.
Is a Short-Term Bond Fund a Good Investment?
Morningstar Director of Personal Finance and Retirement Planning Christine Benz says whether or not to own a short-term bond fund 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 current bond yields, 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 mutual funds and exchange-traded funds to invest in now.
8 Best Short-Term Bond Mutual Funds and ETFs in 2024
These funds land in one of the short-term taxable-bond Morningstar Categories and earn the top Morningstar Medalist Rating of Gold with 100% analyst coverage for one or more of their share classes as of June 2024.
- Baird Short-Term Bond BSBIX
- JPMorgan Limited Duration Bond ETF JPLD
- PGIM Short Duration Multi-Sector Bond Fund/ETF SDMZX PSDM
- PGIM Short-Term Corporate Bond PSTQX
- Schwab Short-Term US Treasury ETF SCHO
- SPDR Portfolio Short Term Treasury ETF SPTS
- Vanguard Short-Term Corporate Bond Index/ETF VSTBX VCSH
- Vanguard Short-Term Treasury Index/ETF VSBSX VGSH
Here’s a little bit about each of these ETFs and mutual funds. All data is as of June 20, 2024.
Baird Short-Term Bond
- Morningstar Category: Short-Term Bond
- Expense Ratio: 0.55%
- Effective Duration: 1.84 years
This top-rated fund is actively managed 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 conservative short-term bond fund, notes Morningstar Director Alec Lucas.
JP Morgan Limited Duration Bond ETF
- Morningstar Category: Short-Term Bond
- Expense Ratio: 0.24%
- Effective Duration: N/A
JP Morgan converted this one-time mutual fund into an ETF in mid-2023. The management team emphasizes short-term mortgage and asset-backed securities. Stringent security selection and stable duration are hallmarks of the strategy at this highly rated fund, which is why this ETF has been less volatile than some of its peers, explains Morningstar Senior Analyst Paul Olmsted. The managers also de-emphasize lower-yielding US Treasuries relative to their loose index, the Bloomberg 1-Year US Government/Credit Index.
PGIM Short-Duration Multisector Bond Fund/ETF
- Morningstar Category: Short-Term Bond
- Expense Ratio: 0.40%
- Effective Duration: 1.94 years
The first of two funds from parent PGIM (the asset-management arm of Prudential Financial) on our list of the best short-term bond funds, PGIM Short-Duration Multisector Bond is an attractive option for investors willing to take on a bit more risk, says Morningstar Director Eric Jacobson. The managers of this top-rated fund attempt to outperform their benchmark, the Bloomberg US Government/Credit 1-3 Year Index, by 150 basis points annually with a flexible mandate that at times delves into high-yield and emerging-markets debt. The portfolio is often closer to the long end of its short-term bond Morningstar Category.
PGIM Short-Term Corporate Bond
- Morningstar Category: Short-Term Bond
- Expense Ratio: 0.38%
- Effective Duration: 2.66 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, observes Morningstar Senior Analyst R.J. D’Ancona.
Schwab Short-Term US Treasury ETF
- Morningstar Category: Short-Term Government
- Expense Ratio: 0.03%
- Effective Duration: 1.89 years
Schwab Short-Term US Treasury ETF is the first name on our list of the best short-term bond funds from the short-term government-bond category. This passive bond ETF tracks the Bloomberg US Treasury 1-3 Year Index. It’s a tough fund to beat in its category, given the efficiency of the very liquid US Treasury bond market and the ETF’s razor-thin expenses, explains Morningstar Analyst Zachary Evens. Credit risk is nonexistent here, given its focus; interest-rate risk is damped with its focus on the short end of the yield curve.
SPDR Portfolio Short Term Treasury ETF
- Morningstar Category: Short-Term Government
- Expense Ratio: 0.03%
- Effective Duration: 1.85 years
The second low-cost passive ETF investing in short-term Treasuries on our list, SPDR Portfolio Short Term Treasury ETF is managed by State Street. As with Schwab’s similar offering, this top-rated ETF maintains virtually no credit risk since it holds only US Treasuries, and it poses limited interest-rate risk, as it favors the short end of the yield curve.
Vanguard Short-Term Corporate Bond
- Morningstar Category: Short-Term Bond
- Expense Ratio: 0.05% (mutual fund), 0.04% (ETF)
- Effective Duration: 2.61 years
This index fund—available as both a mutual fund and as an ETF—tracks the Bloomberg US 1–5 Year Corporate Bond Index, which features US investment-grade corporate bonds with between one and five years in remaining maturity. Like some 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: 1.88 years
Rounding out our list of the best short-term bond funds, Vanguard Short-Term Treasury invests exclusively in short-term US Treasuries. An index fund that’s available as both a mutual fund and an ETF, it tracks the Bloomberg US Treasury 1–3 Year Index, which, as its name suggests, focuses on US 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, reminds Morningstar’s Evens. Ultralow expenses only add to the appeal here.
