Here's a piece from Market Watch that addresses the key factors in maximizing returns on bonds. It then reminds us that we should focus on what we can control when we invest in bonds:
Instead of worrying about economic factors out of their control or what interest-rate moves the Federal Reserve will make, bond-fund shareholders should focus on three things they can do something about, such as expenses, taxes and fund size.
So those are the big three that drive bond-fund returns: expenses, taxes, and size. It's the same for stock funds as well. As such, let's first concentrate on the details around expenses:
The less you pay in fees, the more money you keep.
A fund's asset size affects expenses. Bigger funds can spread fixed costs over more shareholders. Also, funds are often saddled with additional fees for marketing and distribution.
It's the same with stocks. That's why I prefer index funds. The overall return beats most stock funds and a big reason is that the expenses are very low.
Now, we move to the impact of taxes:
Bond yields are taxed as ordinary income, as if you'd earned the money on the job. So higher bracket investors might want to look at municipal bonds, which are free of federal taxes (and free of state tax as well for home-state investors).
Let's wrap up with the impact size has on bond fund returns:
Mammoth size can hurt stock funds, whose buying and selling can jostle prices. But bond funds are different.
"The big guys can trade large blocks, and that can be advantageous," Peterson said. "They can get a little better pricing. Those things add up in the bond world."
Good points. Big bond funds do have an advantage. That's why I use Vanguard funds -- they are among the biggest (and cheapest as well).
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