Bond funds are popular for investors. Many investors who discover the power of compound interest tend never to look back. The appeal of automatic profit reinvestment and exponential growth is too strong to ignore. This is why compounding investors tend to look for financial instruments that align with their strategies. But, unfortunately, when you think about it, there are not that many investments that offer compound interest as a built-in feature; in fact, they tend to be the exception more than the rule.
You would think that bonds, being debt instruments that pay interest, would have built-in compounding, but this is not always the case. Corporate and municipal bonds, for example, do not generally offer compounding; the same goes for foreign bonds that pay enticing rates of interest but pose a greater risk to investors, but this does not mean that you can’t apply a compounding strategy to these bonds. Any bond that pays simple interest can be placed within a compound interest portfolio. Still, you would have to set up a method whereby interest payments are deposited into a high-yield savings or money market account.
Bond Funds Powered By Compound Interest
If you are interested in a more express bond strategy that minimizes direct management in terms of compounding, there are a few options for you to consider, and one of the best is called a bond fund. Similar to mutual funds, bond funds are very large financial portfolios managed by investment professionals who pursue various profit strategies.
To keep things as simple as possible for investors, bond funds offer upfront interest rates paid over the life of the instruments held. You may not always see this because it is part of the fractional net asset value, which is similar to holding shares of the fund. The portfolio managers do the compounding with bond funds, which means you do not have to worry about manually reinvesting proceeds.
With all the above in mind, here are a few mutual bond fund ideas attractive to compound interest investors:
Invesco National Municipal Bond Exchange-Traded Fund
One of the many conveniences of investing in municipal bonds is that they are not subject to federal taxation. As of July 2021, the Invesco National Municipal Bond ETF offered a yield higher than the 10-year United States Treasury Bill. Invesco fund managers evaluate their municipal holdings on a monthly basis. Increasing your investment in this bond fund is as easy as purchasing stocks.
Shenkman Capital Floating Rate Fund
If you are interested in an investment strategy that aligns with the interest rate actions taken by the U.S. Federal Reserve, this high-yield bond fund, which in mid-2021 was paying 3.34%, is definitely one you should consider.
Vanguard Total International Bond ETF
Investing in bonds issued by overseas jurisdictions can be profitable. Still, it can also be very risky, which is why many intelligent investors trust in the portfolio management expertise of Vanguard. On top of compounding, this ETF pays dividends as a way to entice long-term investors.
Ashmore Emerging Markets
The net asset value of this international bond fund, which holds both sovereign and corporate debt issued outside of the U.S., climbed from $9.96 in 2011 to $16.15 in 2021. This fund conveys greater risk, particularly during times when global markets go through corrections, but it is important to remember that market economies are largely cyclical.
SPDR Portfolio Long Term Corporate Bond
Some investors tend to stay away from corporate bonds because they fear that their investment rating can turn into junk status too quickly. For this reason, it is better to look into bond funds such as this one, which is managed by State Street, and which focuses on corporate debt issued by blue-chip companies such as Microsoft, Walmart, General Electric, and other top performers within the S&P 500 index. As of August 2021, the year-to-date return of this ETF was 13.3%, and managers do their best to regularly balance the portfolio so that it does not fall to the whims of Wall Street.