Your Last Chance for Bond Returns

Just when you thought yields on Treasury bonds couldn't possibly go any lower, last week the 10-year yield dropped down close to 1.4% before rebounding slightly. While these record low yields have been a thorn in the side of savers trying to squeeze income out of their investments, bond returns have been a true bright spot in the markets in recent years, with the Barclays Aggregate Bond Index posting an annualized 6.3% return over the past decade and a half.

But fortunately or unfortunately, depending on your position in the market, these record-low rates won't last forever. And when rates start to rise, investors are going to feel the pain as prices for existing lower-rate bonds fall. While I don't think rates are going to rise anytime soon, they will eventually. That means if you want to profit from fixed income, you've got a limited window of opportunity. Passive bond investors can still take advantage of the broad exposure found in cheap exchange-traded funds like iShares Barclays Aggregate Bond ETF (NYSE: AGG  ) and Vanguard Total Bond Market ETF (NYSE: BND  ) . But if you're looking to move beyond the basics, consider one of the following actively managed funds to profit from the last days of the current bond bonanza.

New beginnings
DoubleLine Total Return Bond
(DLTNX) hasn't been around that long, but the process and personnel behind the fund have an extensive track record. DoubleLine Capital was formed just a few years ago after famed bond manager Jeffrey Gundlach left TCW, where he headed up the TCW Total Return Bond Fund (TGMNX) for more than 15 years to great success. The DoubleLine fund follows a similar mortgage bond-focused strategy, investing in various agency and non-agency securities. While almost two-thirds of the fund's holdings are in AAA-rated bonds, another 25% is rated as "junk," with a rating below B. That means credit risk is somewhat higher here than for your average intermediate-term bond fund.

But while this fund may not be the ideal fit for more risk-averse types, investors who want a bond fund with some kick should do well. Gundlach has a tremendous track record of successful investing in the mortgage bond sector, so he's got the skills to navigate this potentially tricky corner of the market. In fact, since its May 2010 inception, DoubleLine Total Return Bond has posted a 12.1% annualized gain, compared with a 6.4% showing for the Barclays Aggregate Bond Index. This fund should be a great source of returns for intrepid bond investors.

Back to basics
If you prefer your fixed-income exposure a bit more plain-vanilla, you should take a second look at Dodge & Cox Income (DODIX). This fund is run by a long-tenured team of 10 portfolio managers, so there are few continuity concerns if any one manager leaves the fund. Corporate bonds are the main attraction here, with the team focusing on bottom-up security analysis rather than top-down macroeconomic calls. You won't find any crazy interest-rate or duration bets, but rather a time-tested value-oriented process that produces steady and consistent returns.

Over the most recent 15-year period, Dodge & Cox Income has earned a 6.4% annualized return, compared with a 5.6% showing for the average intermediate-term bond fund. Because the folks at Dodge & Cox like to make more contrarian moves from time to time, the fund can move out of step with the market and its peers over the short run. But longer-term, the portfolio should provide solid returns, especially given its bottom-up security focus, which can help the fund avoid the many overpriced bonds so common in this late stage of the market cycle. With a low 0.43% price point, this fund is an excellent core bond holding for nearly any investor.

Lesser of two evils
While investors in or near retirement will still need a hefty helping of bonds no matter what interest rates do in the coming years, it's a virtual certainty that bonds won't be able to provide the same kind of chart-topping returns they have in recent years. That means stocks should be a staple in your portfolio. Broad domestic market coverage can easily be had at a low cost with an ETF such as Vanguard Total Stock Market ETF (NYSE: VTI  ) or SPDR S&P 500 ETF (NYSE: SPY  ) . Investors who want to cash in on the dividend trend might want to consider a fund such as Vanguard Dividend Appreciation ETF (NYSE: VIG  ) . Whether you prefer funds for your equity exposure or are a stock picker, make sure you've got some skin in the game here -- stocks are almost certainly going to outperform bonds in the next market cycle.

It's been a great ride for bonds over the past decade or two, but their time in the sun is quickly drawing to a close. If you want to profit from this asset class, you've got to move fast to make your money before the market starts to shift.

Stocks and bonds can help get you closer to your retirement goals, but you'll need more than good investments to ensure your golden years are a success. Be sure to check out our newest special free report, which highlights the shocking truth about your retirement. Take this opportunity to grab your free copy of this can't-miss report today!

Amanda Kish is the Fool's resident fund advisor for the Rule Your Retirement investment newsletter service. She owns shares of iShares Barclays Aggregate Bond ETF. The Motley Fool owns shares of SPDR S&P 500 ETF. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On August 14, 2012, at 4:04 PM, ggconnell wrote:

    iShares High Dividend Equity (HDV)

    out shines

    Vanguard Total Stock Market ETF (NYSE: VTI

    and

    Vanguard Dividend Appreciation ETF (NYSE: VIG

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