By Ben Baden

These short-term bond funds can provide income-hungry investors with a higher yield than money market funds

For investors looking for a bit more yield than what they're getting on savings and money market accounts these days, short-term bond funds may be worth considering. Since the Federal Reserve set interest rates to near-zero levels, yields on savings and money market accounts have been nearly nonexistent (the average money market account recently yielded 0.68 percent, while the average one-year CD yielded 1.07 percent, according to Bankrate.com). Short-term bond funds are offering more generous payouts, with yields that are generally 2 percent or higher.

After money market accounts, short-term bond funds are the next step out on the risk spectrum. Morningstar defines short-term bond funds as those that invest in bonds with durations (a measure of interest-rate sensitivity) of one to 3.5 years. Investors should know that the higher yield offered by short-term bond funds comes with more risks. These funds can be a long-term holding for investors who want to allocate a part of their portfolio to bonds with decent yields and low interest-rate risk relative to longer-term offerings.

"It's been such a long time since investors have had to worry about losses in their short-term bond funds because rates have been steadily heading downward," says Miriam Sjoblom, associate director of fund analysis at Morningstar. Some investors have a misconception that they can't lose money in short-term bonds funds, when in reality it's possible if the Fed begins to hike interest rates or in the case of other distress in the economy. The most recent example was Schwab YieldPlus (symbol SWYSX), which many investors considered a low-risk holding. The fund lost more than 35 percent in 2008 because it was heavily invested in some mortgage-related bonds in the fund that plummeted in value. Investors later sued Schwab and won.

Managers of short-term bond funds invest in a wide range of fixed-income assets, including treasuries, mortgage-backed bonds, corporate bonds, some foreign holdings, and at times, high-yield bonds, Sjoblom says. "For investors looking to move into a bond fund to get a bit more yield, they need to realize they need to have a longer time horizon than they would in a money market fund," she says. With that in mind, here are U.S. News's best short-term bond funds for the long term:

Lord Abbett Short-Duration Income (LALDX).

Currently, this fund is light on U.S. government holdings and heavy on corporate bonds and mortgage-backed securities. Last year was a banner year for the fund, as it finished near the top of its category with a return of 17 percent. The fund, which currently yields 4 percent, has gained an annualized 5 percent over the past decade. Its annual fees are 0.68 percent.

Thompson Plumb Bond (THOPX).

You won't find any exposure to U.S. government securities in this fund. Instead, management had loaded up on corporate bonds, which now make up more than 80 percent of the fund's total assets. The portfolio also has a rather large allocation to cash (30 percent). For a bond fund, Thompson Plumb offers a relatively wild ride: Over the past decade, it has finished four years in the bottom quartile and four years in the top decile of its category, according to Morningstar. The fund, which yields 3 percent, has returned an annualized 7 percent over the last 10 years. Its annual fees are 0.75 percent.

Weitz Short-Intermediate Income (WEFIX).

This all-weather fund landed in the top of its category in both the 2008 downturn and the subsequent rally in 2009. The fund is fairly concentrated in corporate and mortgage-backed holdings. Another 20 percent of the fund's assets are in cash. Management has the option to invest 15 percent of the fund's asset in a mix of convertibles, high-yield bonds, or stocks. The fund, which yields 2.5 percent, has returned an annualized 5 percent over the past 10 years. Its annual fees are 0.62 percent.

MassMutual Premier Short-Duration Bond (MSTDX).

This fund holds a mix of U.S. government debt, corporate bonds, mortgage-backed securities, and a sliver of foreign corporate debt. It also has large cash stake of more than 30 percent. The fund yields 3 percent and has returned an annualized 5 percent over the past decade. Its annual fees are 0.56 percent. Delaware Limited-Term Diversified Income (DTRIX).

This is another well-diversified fund. Its largest allocation is in U.S. corporate bonds, but it also has substantial weightings to U.S. government debt, mortgage-backed securities, and foreign holdings, which make up a little more than 10 percent of total assets. The fund yields 3 percent and has returned an annualized 5 percent over the past decade. Its annual fees are 0.84 percent.

USAA Short-Term Bond (USSBX).

The fund's portfolio leans heavily toward corporate debt and mortgage-backed securities. Management has been known to take on a rather large amount of credit risk; the fund got a boost from its junk-bond holdings in 2009's rally. Over the past 10 years, the fund, which yields 3 percent, has returned an annualized 4 percent. Its annual fees are 0.72 percent.

Vanguard Short-Term Investment-Grade (VFSTX).

As this fund's name suggests, its holdings are made up mainly of investment-grade corporate bonds. Compared with its peers, the fund tends to be lighter on treasuries, which means it takes on more credit risk as opposed to interest-rate risk. Currently, it has almost 20 percent of its total assets invested in foreign corporate debt. The fund, which yields 3 percent, has returned an annualized 5 percent over the past 10 years. At 0.24 percent, the fund's fees are the lowest among the 10 listed here.

Homestead Short-Term Bond (HOSBX).

Outside of treasuries, this fund holds a wide range of asset classes, including corporate debt, mortgage-backed securities, other asset-backed securities, and a small weighting (10 percent) in municipal bonds. About 20 percent of its assets are tucked away in cash. The fund, which yields 5 percent, has returned an annualized 5 percent over the last 10 years. Its annual fees are 0.80 percent.

T. Rowe Short-Term Bond (PRWBX).

In his 15-plus year reign, manager Ted Wiese has never lost money in this fund over a 12-month period, according to Morningstar. Currently, the portfolio is heavy on corporate debt and mortgage-backed securities, and about 15 percent of its total assets are invested in foreign corporate debt. Over the past 10 years, the fund, which yields 3 percent, has returned an annualized 5 percent. Its annual fees are 0.55 percent.

Virtus Multi-Sector Short-Term Bond (NARAX).

At times, this fund will take big risks that can result in big payoffs or heavy loses. Those bets caused it to lose 14 percent in 2008, landing it near the bottom of its category. The fund rebounded strongly in 2009 with a 30 percent gain. As the fund's name suggests, management has the option to invest in 12 different sectors, including junk bonds and bank loans. It currently has large holdings in corporate bonds, mortgage-backed securities, and foreign bonds. The fund, which yields 5 percent, has returned an annualized 6 percent over the past 10 years. Its annual fees are 1.12 percent.

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