Bond Index Funds

“With extremely low interest rates and inflationary pressures, it could be the worst time in 100 years to invest in bonds or other nominal assets. So in this environment, it’s worth considering some alternative bond styles. Vanguard Tax–Exempt Bond Index (VTEBX) could be attractive for investors in higher tax brackets. The underlying municipal bonds generally provide a good yield for the risk involved. Many of these bonds are priced attractively because local government finances are under pressure. Any relief from the federal government will support these bonds. Looking beyond index-linked funds, there are several ETFs that invest within a single locality. For example, MHN for New York, and CMF for California. Depending on an investor’s state tax exposure, these funds might provide more of an advantage than VTEBX. Another fund to consider is Fidelity Inflation-Protected Bond Index Fund (FIPDX). This fund is based on Treasury Inflation-Protected Securities (TIPS), which are quite safe from a credit perspective, and provide protection against inflation. Because there is a general “tug of war” between high interest rates and high inflation rates, this fund could weather both conditions. Of course, TIPS use the CPI to measure inflation, and that index might not capture every inflationary effect (e.g. the price of real estate).”