By Charles Lynn Bolin

There may be a place for tax-exempt municipal bond funds in the portfolios of middle-class and upper-middle-class American households as well as for those in the upper-income group. I have about 15% of my fixed-income funds invested in municipal bonds. They may be suitable in long-term after-tax accounts where you want to reduce taxes. State-focused municipal bond funds may also reduce state income taxes. This article discusses five Lipper Municipal Bond categories with respect to increasing yield while managing risk.

I own Vanguard Tax-Exempt Bond Index ETF (VTEB), Fidelity Tax-Free Bond (FTABX), Vanguard High-Yield Tax-Exempt Inv (VWAHX), Vanguard Tax-Exempt Bond Index Admiral (VTEAX), and Fidelity Intermediate Municipal Income (FLTMX) from the Municipal General & Insured Debt and Municipal Intermediate Debt categories. Note that Vanguard High-Yield Tax-Exempt Inv (VWAHX) is in the Municipal General & Insured Debt category and not the Municipal High Yield category.

Tax Brackets For 2025

Daniel Bortz at AARP wrote Here Are the Federal Income Tax Brackets for 2025 with the following table. The key brackets are having income levels where marginal tax rates jump from 12% to 22% and from 24% to 32%. Another reason to own municipal bonds is to hold them in a long-term account where the income is not needed and you want to keep taxes low.

Table #1: Federal Income Tax Brackets for 2025.

Fidelity Tax Equivalent Yields Calculator

Fidelity has a nifty Calculator for Fixed Income Taxable-Equivalent Yields for Individual Bonds, CDs, & SPDAs. The link is provided here. The green shaded area is for an investor filing taxes “Married Filing Jointly” with $200,000 in household income and making 3% on an out-of-state municipal bond. The couple would have to make 3.68% on Treasury and Agency bonds to be the equivalent of 3% in tax-exempt yields. If I don’t need the income for several years in a particular account and the yields are close, then I favor municipal bonds. For municipal bonds to be competitive with Treasuries now, the couple would need to have a 3.5% yield on out-of-state municipal bonds which is doable.

Table #2: Fidelity Calculator for Fixed Income Taxable-Equivalent Yields

Lipper Categories with High Yields and Low to Moderate Risk

I created an “Overall” ranking system to combine Risk, Yield, Return, Quality, Trend, and Tax-Efficiency factors into an overall rating. Table #3 shows the categories sorted by “Overall, Yield, Safety, Risk Adjusted Yield, and Three-Month Return. Muni High Yield debt is attractive for yield, but not for safety. The categories may be appropriate for different Investment Buckets for short, intermediate, and long-term investing goals.

Table #3: Performance of Lipper Categories with High Yields

I extracted all mutual funds and exchange-traded funds using the MFO Premium Fund Screener and Lipper global dataset. What Table #4 tells us is that municipal short and short-intermediate debt categories don’t have as high assets under management as the other categories which have higher yields and longer durations. Note also that municipal high-yield debt has a lower percentage invested in low-rated “Junk” debt than taxable high-yield debt.

Table #4: Metrics for Lipper Categories with High Yields

Table #5 is based on the history of nearly 300 mutual funds and exchange-traded funds. Municipal intermediate debt and municipal general & insured debt have full cycle returns of 4% to 5% and low drawdowns. These are where the bulk of my investments in municipal bonds are. Municipal high-yield debt has higher yields and full-cycle returns, but also higher drawdowns.

Table #5: Performance of Lipper Categories with High Yields

The Chosen Few

I selected one fund, most interesting to me as a moderately conservative investor, from each of the five Lipper Categories covered in the article. They are sorted loosely from lower risk on the left with yields around 3% to higher risk on the right with yields around 4%.

Table #6: Author’s Select High Performing Funds Per Lipper Category (3-Year Metrics)

JPMorgan Ultra-Short Municipal Income ETF (JMST) has averaged 3.4% for the past two years with low volatility. Vanguard High-Yield Tax-Exempt (VWAHX) has averaged 5.1% but with more volatility.

Figure #1:  Author’s Select High Performing Funds Per Lipper Category

Municipal Short Debt

Lipper U.S. Mutual Fund Classification Short Municipal Debt Funds: Funds that invest in municipal debt issues with dollar-weighted average maturities of less than three years.

These are low-risk funds currently yielding over 3%. I favor MFO Great Owl iShares Short Maturity Municipal Bond Active ETF (MEAR).

Table #7: High-Performing Municipal Short Debt Funds (3-Year Metrics)

Figure #2: High-Performing Municipal Short Debt Funds (3-Year Metrics)

Municipal Short-Intermediate Debt

Lipper U.S. Mutual Fund Classification Short-Intermediate Municipal Debt Funds: Funds that invest in municipal debt issues with dollar-weighted average maturities of one to five years.

Municipal short-intermediate debt funds are a relatively low-risk option since short-term rates are expected to decline over the next few years. Yields are generally above 3.0%.

Table #8: High-Performing Municipal Short-Intermediate Debt Funds (3-Year Metrics)

Figure #3: High-Performing Municipal Short-Intermediate Debt Funds

Municipal Intermediate Debt

Lipper U.S. Mutual Fund Classification Intermediate Municipal Debt Funds: Funds that invest in municipal debt issues with dollar-weighted average maturities of five to ten years.

The high-performing municipal intermediate debt funds in Table #9 have returned 2.0% to 3.0% over the past year with a yield in the range of 3.0% to 3.5%. Of the ETFs, I like JPMorgan Municipal ETF (JMUB) for its higher return and yield, although it had a drawdown of 11.3% over the past three years. Those seeking higher risk-adjusted returns may prefer Dimensional National Municipal Bond ETF (DFNM).

Table #9: High-Performing Municipal Intermediate Debt Funds (3-Year Metrics)

Figure #4: High-Performing Municipal Intermediate Debt Funds

Municipal High Yield Debt

Lipper U.S. Mutual Fund Classification High Yield Municipal Debt Funds: Funds that typically invest 50% or more of their assets in municipal debt issues rated BBB or less.

High-performing municipal high-yield debt funds have returned more than 7.0% for the past year with the exception of VanEck Short High Muni ETF (SHYD). I favor SHYD as a lower-risk venture into municipal high-yield bonds. High-yield funds may have a drawdown of 10% to 20% during a major bond downturn. They have had full cycle returns of 4.5% to 5.0% and yield 3.7% to 4.3%.

Table #10:  High Performing Municipal High Yield Debt Funds (3-Year Metrics)

Figure #5: High Performing Municipal High Yield Debt Funds

Municipal General & Insured Debt

Lipper U.S. Mutual Fund Classification General & Insured Municipal Debt Funds: Funds that either invest primarily in municipal debt issues rated in the top three credit ratings or invest primarily in municipal debt issues insured as to timely payment.

I own Vanguard High-Yield Tax Exempt (VWAHX) in the general & insured municipal debt category as opposed to a fund in the high-yield municipal debt category. While its drawdown during the past three years matches those in the high-yield municipal debt category, its performance during the financial crisis was much better. It has a yield of 4.1%.

Table #11: High-Performing Municipal General & Insured Funds (3-Year Metrics)

Figure #6: High-Performing Municipal General & Insured Funds

Closing

I have a loose target of having about 50% of my investments in Traditional IRAs, 25% in Roth IRAs, and 25% in after-tax accounts. Pensions, Social Security, after-tax investment income, and withdrawals from Traditional IRAs are taxable income. Managing taxes is part of my overall investment strategy. As a result of researching this article, I have invested more in taxable bonds with higher yields in some shorter-term accounts, and increased risk primarily in the municipal general & insured debt category in accounts that I managed to pass along as inheritance.

I will be meeting with a CPA later this year to review my tax management strategy. I am a firm believer in using Financial Advisors.

By David Snowball

A tradition dating back to the days of FundAlarm was to annually share our portfolios, and reflections on them, with you. My portfolio, indolent in design and execution, makes for fearfully dull reading. That is its primary charm.

This is not a “here’s what you should own” exercise, much less an “envy me!” one. Instead, it’s a “here’s how I think. Perhaps it will help you do likewise?” exercise.

My portfolio and my life

By design, my portfolio is meant to be mostly ignored for all periods because, on the whole, I have much better ways to spend my time, energy, and attention. For those who haven’t read my previous discussions, here’s the short version:

Stocks are great for the long term (think: time horizon for 10+ years) but do not provide sufficient reward in the short term (think: time horizon of 3-5 years) to justify dominating your non-retirement portfolio.

An asset allocation that’s around 50% stocks and 50% income gives you fewer and shallower drawdowns while still returning around 6% a year with some consistency. That’s attractive to me.

“Beating the market” is completely irrelevant to me as an investor and completely toxic as a goal for anyone else. You win if and only if the sum of your resources exceeds the sum of your needs. If you “beat the market” five years running and the sum of your resources is less than the sum of your needs, you’ve lost. If you get beaten by the market five years running and the summer of your resources is greater than the sum of your needs, you’ve won.

That might be the single most important perspective you can take away this month. Investing is about having reasonable security in support of a reasonably rich life. Not yachts. Not followers. Not bragging rights. Life.

“Winning” requires having a sensible plan enacted with good investment options and funded with some discipline. It’s that simple.

My portfolio is built to allow me to win. It is not built to impress anyone.

My asset allocation decisions

Stocks are rewarding in the long run, gut-wrenching in the short run, and frequently miserable disappointments in the medium run. The “miserable – medium” sentence translates to this: it is painfully common for the stock market to go 5 – 10 years without a gain. A Canadian financial education site, A Measure of a Plan, offered this 150-year chart of US market performance.

So, on a rolling basis, there appear to have been 14 decade-long periods and two dozen five-year periods in which investors made no money. On the whole, I would prefer steady gains to mixing spectacular gains, sickening losses, and years of futility. That led me to an unconventional asset allocation: 50%.

“50% what?” you ask. 50% everything. My portfolio targets 50% equity and 50% not, which translates to 50% growth and 50% stability. My equity portfolio targets 50% US and 50% not. My stability portfolio targets 50% bonds and 50% not.

That’s based on a lot of research from T. Rowe Price on the return/volatility tradeoff as portfolios increase their exposure to stocks. Short version: you pay a very high price in the short- to medium-term for a prospective gain of two or three percent in returns. A 50% portfolio offers the prospects of returns of 6-7% on average with a small fraction of the market’s downside. That works for me.

My year-end 2024 allocation

Domestic equity	Close enough	Traditional bonds	Nailed it
Target 25%	2024: 23%	Target: 25%	2024: 25%
Also managed a 50% large-cap / 50% small to mid-cap weight.		Surprising sources: Palm Valley Capital is 30% short-term bonds
International equity	Overweight	Cash / market-neutral / liquid	Close enough
Target 25%	2024: 31%	Target: 25%	2022: 22%
This has been a pretty long-lasting overweight. The average US investor has 15% of their equities in international stocks while I’m targeting 50% and sitting at 60%.		Rather a lot of my managers have found reason to hold a lot of cash of late. FPA, Leuthold, and Palm Valley all sit at or above 20%.

Here’s what that looks like in terms of performance and volatility.

	Annual return	Max Loss	Standard Deviation	Sharpe Ratio	Ulcer Index
2024	6.7	-2.0	5.3	0.32	0.9
Three year	2.7	-16.2	9.4	-0.14	6.9
Five year	7.1	-17.6	11.1	0.42	6.6

The three-year performance looks bad because it includes 2022 when the stock market dropped 23% and the bond market fell 13%. The Indolent Portfolio did better than either in 2022 and about 4% better than a hypothetical portfolio with the same weightings. And that’s been true most years: 1-2% better than a peer-weighted portfolio, 6-9% returns, volatility in check.

My investment choices

I own 11 funds. Yes, I know that’s more than I need. Some of the sprawl represents my interest in tracking newer and innovative funds, some represent a tax trap (I have a lot of unrealized gains) and some is indolence. A fund is doing fine, so why bother to change?

In general, my core funds are equity-oriented but the managers have the freedom (and the responsibility) to invest elsewhere when equities are not offering rewards that match their risks.

Core growth funds – 2024

		Weight	APR	Max Loss	Standard Deviation
FPA Crescent	Flexible Portfolio	22%	14.0	-2.0	6.1
Palm Valley Capital	Small-Cap Growth	8%	4.2	-0.4	0.0
Leuthold Core Investment	Flexible Portfolio	6%	7.7	-5.0	10.3
Brown Advisory Sustainable Growth	Multi-Cap Growth	6%	20.2	-5.5	12.0

Leuthold and FPA are two very different versions of disciplined “go anywhere” funds; each seeks equity-like returns with sub-market risk. Leuthold is a quant fund, and FPA’s bias is “absolute  value.” Palm Valley Capital is the fourth incarnation of Eric Cinnamond’s strict small-cap discipline: he loves great stocks but would rather sit on hot coals than buy stocks that aren’t priced for exceptional gains. Lots of cash for long periods, which is frustrating for some and just fine for me. Brown Advisory was my choice for the best sustainable equity fund I could find. Their attention to quality and valuations was negative in 2024.

Core income / market neutral funds – 2024

	Category	Weight	Return	Max loss
T Rowe Price Multi-Strategy Total Return	Alternative Multi-Strategy	10.0%	5.3	-0.7
T Rowe Price Spectrum Income	Multi-Sector Income	5.0%	4.0	-1.6
RiverPark Strategic Income	Flexible Portfolio	8.0%	8.2	0.0
RiverPark Short Term High Yield	Short High Yield	8.0%	5.3	0.0

Multi-Strategy is Price’s version of a hedge fund for the common investor. It’s growing on me with a low correlation to the market, and low downside capture. Spectrum is a fund-of-income fund. And the two RiverPark funds are low-risk, credit-oriented investments. Short Term made money in 2022 when everything else faltered.

That whole “international overweight” thing – 2024

	Category	Weight	Return	Max loss
Seafarer Overseas Value	International Small / Mid-Cap Value	4.0%	-3.3	-7.3
Grandeur Peak Global Micro Cap	Global Small- / Mid-Cap	14.0%	3.2	-6.0
Seafarer Overseas Growth and Income	Emerging Markets	9.0%	-5.4	-9.2

In general, I’ve never understood why buying shares of large multinational corporations nominally headquartered in London would logically produce results different from buying shares of large multinational corporations nominally headquartered in Boston. As a result, my impulse was to look at smaller markets and smaller companies. In theory, that should work splendidly. In practice, it’s so-so.

Alternatives to my choices

It’s not necessary to own more than two or three funds to create an indolent portfolio. The key choice is whether you want to build substantial cash (or cash-like securities) into the mix or stick with stocks and bonds alone.

The Bogleheads endorse a three-fund portfolio which does not consider “cash” to be an investment. Their process has two steps: (1) pick the asset allocation that’s right for you and (2) buy three low-cost index funds that give you exposure to the assets you’re seeking. Their default set is:

• Vanguard Total Stock Market Index Fund (VTSAX)
• Vanguard Total International Stock Index Fund (VTIAX)
• Vanguard Total Bond Market Fund (VBTLX)

Step One – “figure out your asset allocation” – is the tricky one there. A very simple two-fund portfolio – one flexible fund in the hands of a top tier manager and one incoming producing fund similarly skippered – split 50/50 could replicate my portfolio and would require negligible maintenance.

The small investor’s indolent portfolio

	Lipper Category	Weight	APR	Max Loss
Portfolio	–	100.0%	6.8	-2.2
RiverPark Short Term High Yield	Short High Yield	50	5.3	0.0
Leuthold Core Investment	Flexible Portfolio	50	7.7	-5.0

  Alternately …

	Lipper Category	Weight	APR	Max Loss
Portfolio	–	100.0%	11.1	-0.9
FPA Crescent	Flexible Portfolio	50.0%	14.0	-2.0
RiverPark Strategic Income	Flexible Portfolio	50.0%	8.2	0.0

Bottom Line

The best portfolio, like the best water heater or best car, is the one that you never need to think about. My portfolio assumes a balanced allocation with the average fund being in the portfolio for more than a decade. That strategy doesn’t make me rich, it makes me happy. And that’s rather the goal!

By Charles Lynn Bolin

What kind of investor are you? Do you want yield, safety, yield with a reasonable risk, or total return? I created a ranking system to combine Risk, Yield, Return, Quality, Trend, and Tax-Efficiency factors into an overall rating. I used yield divided by Ulcer Index which measures the depth and duration of drawdowns to limit the number of categories that I evaluate.

My favorites may not be the same as yours. Table #1 shows how I rank the categories. I will be discussing each Lipper Category in the order of the “Overall” column. Approximately 10% of my bond investments are in six of the eight categories but the bulk of my bond investments are in bond ladders and core bonds along with diversification into global and international income categories.

Table #1: Performance of Lipper Categories with High Yields

I extracted all mutual funds and exchanged traded funds using the MFO Premium Fund Screener and Lipper global dataset. What Table #2 tells us is that global high-yield and short high-yield categories don’t have as many funds or assets under management, and investors should invest with caution. Loan participation funds are interesting because they have a lower percentage of assets rated below investment grade, a small effective duration, and a high yield. High-yield categories have the highest 30d yields and the lowest-rated quality assets. Core plus bond funds have a longer duration and have performed poorly with rising rates.

Table #2: Metrics for Lipper Categories with High Yields

Table #3 is based on the history of nearly 400 mutual funds and exchange-traded funds. The top four categories have current yields of about 6% or more, full cycle returns of 4% to 7%, and drawdowns during severe market downturns of 13% to 20%. If investing in these categories go in with eyes wide open. By comparison, during the Dotcom Full Cycle from September 2000 to October 2007, the S&P 500 had an annualized return of around 2.0% The bottom four categories have lower yields and lower risk. Core plus bond funds performed relatively well during the financial crisis. I have invested in multi-sector funds as a middle-of-the-road option.

Table #3: Performance of Lipper Categories with High Yields

The Chosen Few

I selected one fund, most interesting to me as a moderately conservative investor, from each of the eight Lipper Categories covered in the article. Table #4 is packed with useful information about risk (MFO Risk, MaxDD %, Bear Markets), risk-adjusted return (MFO Rating), returns (APR, Full Cycle), trends (Fund Flow, EMA), quality (Quality, Junk), and expenses (ER, FMR), and yield.

Last month, I bought Janus Henderson AAA CLO ETF (JAAA) as a lower-risk fund with a 30d yield of 6.0% and Franklin Senior Loan Fund ETF (FLBL) with a 30d yield of 7.2% but a little more risk. I bought Fidelity Capital & Income (FAGIX) with a 30d yield of 5.2%. It has about 21% in equity and is higher risk and higher potential reward. The funds are loosely sorted with the safest to the left and riskier to the right in Table #4. For a future article, I have screened high-yielding funds rated with an MFO Risk of “Very Conservative” and Great Owl First Trust Enhanced Short Maturity ETF (FTSM), Vanguard Ultra-Short Bond ETF (VUSB), and Janus Henderson AAA CLO ETF (AAA) are among the fourteen on the list.

Table #4: Author’s Select High Performing Funds Per Lipper Category (2.5 Year Metrics)

The steady profile and low volatility can be observed in Figure #2 below for First Trust Enhanced Short Maturity ETF (FTSM), Vanguard Ultra-Short Bond ETF (VUSB), Janus Henderson AAA CLO ETF (JAAA), and to a lesser extent Franklin Senior Loan Fund ETF (FLBL). As longer-term yields start to stabilize, I expect JPMorgan Income ETF (JPIE), Fidelity Capital & Income (FAGIX), and American Century Diversified Corporate Bond ETF (KORP) to start to perform better. Note that some of these funds have averaged a respectable return of 7% to 13% over the past two years.

Figure #2:  Author’s Select High Performing Funds Per Lipper Category

Loan Participation Funds

Lipper U.S. Mutual Fund Classification Loan Participation Funds: Funds that invest primarily in participation interests in collateralized senior corporate loans that have floating or variable rates.

Loan participation funds are a diverse group that can make returns of 5% to 8% during rising or falling rates. They can have positive returns during a mild recession, but some may lose 20% or much more during a severe financial crisis. Percent Junk Plus Not Rated is a fairly good indicator of performance during a severe downturn in bond prices as shown in Figure #3. For this reason, I bought more of Janus Henderson AAA CLO ETF (JAAA) than I did of Franklin Senior Loan ETF (FLBL).

Figure #3:  2022 Returns Versus Percent Junk Plus Not Rated

Most of the loan participation funds that I selected for Table #5 have lower risk and volatility; however, BlackRock Floating Rate Income Portfolio (BFRAX) had a drawdown of 19.6% during the financial crisis compared to Fidelity Floating Rate High Income (FFRHX) which had a drawdown of 8.4%.

Table #5: High Performing Loan Participations Funds (2.5 Year Metrics)

Janus Henderson AAA CLO ETF (JAAA) is one of my favorites because of its low drawdown and volatility which can be observed in Figure #4. It invests in higher-quality assets.

Figure #4: High Performing Loan Participations Funds

Short High Yield

Lipper U.S. Mutual Fund Classification Short High Yield: Funds that aim at high (relative) current yield from domestic fixed-income securities, with dollar-weighted average maturities of less than three years, and tend to invest in lower-grade debt issues.

Short high-yield funds have a lower risk compared to most other categories in this article with decent returns compared to other short-term bond funds. I bought Fidelity Short Duration High Income (FSAHX) because it has a lower percentage of “Junk” rated bonds and a lower drawdown. Of the ETFs, I favor Xtrackers Short Duration High Yield Bond ETF (SHYL).

Table #6: High Performing Short High Yield Funds (2.5 Year Metrics) 

I focus on performance over the last year or two because the Federal Reserve has stopped raising rates, but check how the fund performed during the latest downturn. While Fidelity Short Duration High Income (FSAHX) has underperformed recently, it had a lower drawdown during the COVID recession.

Figure #5:  High Performing Short High Yield Funds

Global High Yield

Lipper U.S. Mutual Fund Classification Global High Yield: Funds that aim at high (relative) current yield from both domestic and foreign fixed-income securities, have no quality or maturity restrictions, and tend to invest in lower-grade debt issues.

The global high-yield category does not have many quality funds, but I identify Invesco Global ex-US High Yield Corporate Bond ETF (PGHY) and AB Short Duration High Yield ETF (SYFI) as high performers with respectable yields, but moderately large drawdowns.

Table #7: High Performing Global High Yield Funds (2.5 Year Metrics)

Of the two funds, I favor Invesco Global ex-US High Yield Corporate Bond ETF (PGHY) for its risk-adjusted performance.

Figure #6: High Performing Global High Yield Funds

High Yield

Lipper U.S. Mutual Fund Classification High Yield: Funds that aim at high (relative) current yield from domestic fixed-income securities, have no quality or maturity restrictions, and tend to invest in lower-grade debt issues.

Of the ETFs, I like iShares 0-5 Year High Yield Corporate Bond ETF (SHYG) and expect it to perform better during falling rates or a market downturn with less volatility. I bought modest amounts of Fidelity Capital & Income (FAGIX) and Fidelity High Income (SPHIX) for diversification within the high-yield category.

Table #8:  High Performing High Yield Funds (2.5 Year Metrics)

Figure #7 shows the diverse range of performance of high-yield funds due in part to hedging, duration, percent junk, and owning equity.

Figure #7: High Performing High Yield Funds

Short Investment Grade Debt

Lipper U.S. Mutual Fund Classification Short Investment Grade Debt: Funds that invest primarily in investment-grade debt issues (rated in the top four grades) with dollar-weighted average maturities of less than three years.

Columbia Threadneedle Investments wrote As Interest Rates Rise, Investors May Look To Floating-Rate Funds explaining that while floating-rate bonds do well when rates are stable or rising, they tend to underperform when rates are falling. I favor Fidelity Low Duration Bond Factor ETF (FLDR) for its high yield and low volatility.

Table #9:  High Performing Short Investment Grade Debt Funds (2.5 Year Metrics)

Figure #8:  High Performing Short Investment Grade Debt Funds

Multi-Sector Income

Lipper U.S. Mutual Fund Classification Multi-Sector Income: Funds that seek current income by allocating assets among several different fixed-income securities sectors (with no more than 65% in any one sector except for defensive purposes), including U.S. government and foreign governments, with a significant portion of assets in securities rated below investment-grade.

Exchange-traded funds are relatively new to the Multi-Sector Income category and of the two, I prefer JP Morgan Income ETF (JPIE). I purchased modest amounts of both the Vanguard Multi-Sector Income Bond (VMSAX) and Fidelity Strategic Income (FADMX) for Traditional IRAs.

Table #10:  High Performing Multi-Sector Income Funds (2.5 Year Metrics)

Figure #9:  High Performing Multi-Sector Income Funds

Short-Intermediate Investment Grade Debt

Lipper U.S. Mutual Fund Classification Short-Intermediate Investment Grade Debt: Funds that invest primarily in investment-grade debt issues (rated in the top four grades) with dollar-weighted average maturities of one to five years.

I favor Great Owl First Trust Short Maturity ETF (FTSM) for its low volatility and drawdown. I own Fidelity Intermediate Bond (FTHRX) but traded a modest portion for other bond funds discussed in this article.

Table #11:  High Performing Short-Intermediate Investment Grade Debt (2.5 Year Metrics)

Figure #10:  High Performing Short-Intermediate Investment Grade Debt Funds

Core Plus Bond

Lipper U.S. Mutual Fund Classification Core Plus Bond Funds: Funds that invest at least 65% in domestic investment-grade debt issues (rated in the top four grades) with any remaining investment in non-benchmark sectors such as high-yield, global, and emerging market debt. These funds maintain dollar-weighted average maturities of five to ten years.

This is my least favorite category as its total return has been hampered as rates rose because of its longer duration, but I will continue to monitor it throughout the year. It is a category that I may want to own in the future as longer-term rates stabilize. The standout core plus bond fund is the Great Owl American Century Diversified Corporate Bond ETF (KORP).

Table #12:  High Performing Core Plus Bond Funds (2.5 Year Metrics)

Figure #11 shows the one-year trends on core plus funds have been strong but the recent three-month trends are waving red flags. I will continue to monitor.

Figure #11:  High Performing Core Plus Bond Funds

Closing

To prepare for 2025, I invested in high-yielding funds with low to moderate risk. These are the low-hanging fruit. There is plenty of opportunity to increase yields along with higher risk by investing in different funds within the same categories.

It is possible to find funds with higher yields in other Lipper Categories. They usually have an Aggressive or Very Aggressive MFO Risk Rank, usually accompanied by below-average risk-adjusted performance as measured by MFO Rank, and often with very high expenses. No, thank you!

By David Snowball

Every day, Americans rely on 2.2 million miles of aging water pipes, some laid before the Civil War, to deliver life’s most essential resource. This vast network is crumbling beneath our feet, requiring over $2 trillion in repairs and upgrades by 2043. Yet this infrastructure crisis isn’t just about fixing what’s broken – it’s about building for a future where three-quarters of Earth’s land masses are becoming permanently drier and extreme weather events are the new normal.

For investors, this convergence of urgent infrastructure needs and climate adaptation creates both responsibility and opportunity. But with options ranging from focused water ETFs to broader infrastructure funds, making the right choice isn’t straightforward. This guide will help you navigate the landscape of water infrastructure investing, weighing both the compelling case for sector-specific investment and the practical challenges that come with it.

The Volker Alliance estimates that the states already face an estimated backlog of nearly $1 trillion for deferred maintenance and needed upgrades to public infrastructure. In January 2025, “Not Built for This: The Argument for Infrastructure Investing in an Unstable Climate” highlighted the case for infrastructure investments in your portfolio and the infrastructure funds, both open-end and exchange-traded, that might be worth consideration. WABAC, a member of the MFO discussion community, argued that “any discussion of new opportunistic infrastructure funds is incomplete without mentioning water funds. Start with PHO or FIW if you are H2O curious. There are global water funds, but they have faced rougher sledding over the past three years. You could start with PIO and TBLU. I’m not smart enough to imagine how they might perform in the tariff regime promised by our new president.” Since I take our board members’ insights seriously, we are offering this addendum on water infrastructure investing for you.

Water infrastructure includes drinking water, wastewater, and stormwater services. There are two drivers of demand for investment in water infrastructure. First, we’ve allowed our existing infrastructure to deteriorate. The American Society of Civil Engineers estimates that US water infrastructure needs, in particular, are huge:

In 2024 alone, the projected gap between water infrastructure needs and spending in the United States will be $91 billion; by 2043, the cumulative gap will be over $2 trillion. (Bridging the Gap: The Power of Investment in Water, May 2024)

By their calculation, fully funding water infrastructure needs would generate “a $4.5 trillion gain in GDP, the creation of 800,000 new jobs, and a $2,000 annual increase in household earnings.” Water investment vehicles enable participation in a sector where every $1 million invested creates 10–15 jobs while addressing existential climate risks

Second, water-related infrastructure investments are becoming increasingly critical as climate instability intensifies water scarcity, flooding, and ecosystem degradation. A sobering report released in December 2024 finds that “human-driven climate change is leading to a permanent state of increased dryness on 77.6% of the Earth’s land masses, a steady desiccation that has been playing out over the 30-year period from 1990 to 2020” (“Three-Quarters of the Earth Has Gotten Permanently Drier,” Time, 12/10/2024 reporting on the UN Convention to Combat Desertification, The Global Threat of Drying Lands, 12/2024). This isn’t discussing drought, which is temporary. It’s documenting a permanent change in the water cycle. In the US, the arid zone is moving relentlessly eastward “with no end in sight” according to scientists from Colorado State and the University of Michigan. Aridification is threatening food security, while extreme rainfall events are increasing in frequency and intensity. These trends are not hypothetical, they are happening now, and they demand practical solutions. Investing in water infrastructure is about adapting to these realities, regardless of their cause. It’s about protecting communities, economies, and the environment from the challenges we already face.

Infrastructure investments support climate resilience through improved water management systems, sustainable technologies, and natural infrastructure solutions like watershed restoration. Financial instruments like water-focused mutual funds and ETFs offer investors exposure to this essential sector while contributing to long-term environmental stability.

Role in Climate Resilience 

Water infrastructure investments address three key climate challenges: 

1. Adaptation: Supporting technologies like smart water systems and desalination plants
2. Risk Mitigation: Restoring floodplains and wetlands to reduce disaster impacts
3. Sustainability: Funding utilities and companies improving water efficiency and recycling

These investments align with global priorities to modernize aging systems. Two questions remain:

1. Does it make any sense to invest in a water fund, as opposed to a broader infrastructure fund?
2. If it does make sense for you, which options might align with your goals?

Choosing broad or narrow

Everything above supports investing in water resources, which undeniably benefit from long-term tailwinds. However, there are two elements of a case against them.

First, investors misuse thematic funds. Jeff Ptak is the latest in a long line of Morningstar analysts to assess the performance of thematic / sector funds as a group. Mr. Ptak looked at two metrics: (1) the timing of investor moves into thematic funds and (2) the performance of those funds over the three years ending November 30, 2024. The results were not pretty:

What I found is that, over those three years, the average dollar invested in thematic funds lost around 7% per year. Even when you remove the largest thematic fund―ARK Innovation ETF, which famously soared, gathered billions in assets, and then fell like a stone―these funds still lost almost 6% per year in dollar-weighted terms. To put that in perspective, the S&P 500 gained more than 11% per year over that span. (“What Does it Cost to Be Entertained By Your Investments? Try 14% a Year,” Morningstar.com, 1/15/2025)

The problems were manifold: the funds’ performance sucked, they charge a lot and investors mistimed purchases. We, as a group, bought funds in areas that the analysts (and shills) were hyping. Ptak’s suggestion: if you want to invest in a sector fund, pick the area that Wall Street has written off for dead. With annualized returns, for the water funds below, -2.5% to 3.2% over the past three years, maybe water qualifies?

Second, broader funds might get you there with less fuss. Water funds tend to focus on smaller, high-growth companies which typically do not pay dividends. That means they tend to be more volatile and, hence more likely to scare off investors than the average equity. Other places where water investments lie, albeit in limited quantity, are infrastructure and utilities funds. The average infrastructure fund offers 5-15% exposure to water infrastructure investments. The average utility fund is about 3% “pure” water and 22% diversified utility companies which would likely have water infrastructure in their portfolios.

Five-year snapshot, three peer groups, and three top performers

The water group is composed of the water-centered funds and ETFs below, while infrastructure and utilities are Lipper peer groups. Within each group, we picked our top-ranked Great Owl fund or best performer to help answer the question, how good can it get?

	APR	Max loss	Standard dev	Sharpe Ratio	Ulcer Index	SP500 Capture Ratio	Expense ratio	Yield
Water group	8.3	-29.6	20.2	0.29	12.2	0.81	0.76	0.9
Infrastructure group	4.0	-24.7	18.8	0.09	10.1	0.76	0.83	2.6
Utilities group	6.2	-21.4	18.5	0.20	8.8	0.82	1.16	3.7
Invesco Water Resources	11.8	-24.7	20.3	0.46	9.8	0.91	0.59	0.5
GlobalX US Infrastructure	18.6	-30.2	25.9	0.63	8.4	1.0	0.47	0.5
Virtus Reeves Utilities ETF	11.6	-18.2	19.3	0.47	6.8	1.1	0.49	1.5

Collectively, water funds outperformed both infrastructure and utilities, but with substantially more volatility (measured by the funds’ maximum drawdown over the period and by their standard deviation). In risk-adjusted terms, the picture is muddled: water had a higher Sharpe ratio (which is good) but also a higher Ulcer Index (which is bad, with higher Ulcer ratings translating to deeper and longer drawdowns hence more ulcers). Utilities predictably threw off more cash.

Choosing a water fund

We used the MFO Premium screener to identify all funds and ETFs older than three years with “water” in their names (then threw out the ones where Water was just part of the advisor’s name).

		Expense Ratio	5-Yr Return	AUM ($M)	Key Focus Areas	US Exposure	Total Holdings + Top Holdings
First Trust Water ETF	FIW	0.53%	12.0	1,776	Passively managed, tracks ISE Clean Edge Water Index, U.S. water equipment & utilities, small-midcap border, growth, five stars	90	36 stocks: Waters Corp, IDEX, Agilent Tech
Invesco Water Resources ETF	PHO	0.60%	11.8	2131	Passively managed, tracking NASDAQ OMX US Water index, midcap growth, five star	94	38 stocks : Ecolab, Roper Technologies, Ferguson Ent.
Tortoise Global Water ETF	TBLU	0.40%	8.0	55	Actively managed, ESG focus, midcap growth/core border, four star	43	41 stocks: Veolia, Geberit, Veralto
Invesco S&P Global Water ETF	CGW	0.57%	7.5	888	Passively managed, S&P Global Water Index, global utilities & infrastructure, midcap growth, four star	57	63 stocks: Xylem, American Water, Veralto
Calvert Global Water	CFWAX	1.24%	6.8	530	Passively managed, tracks Global Water Research Index, ESG-aligned water stewardship, midcap core, four star	48	112 stocks: Pentair, Ecolab, Zurn Elway Water Solutions
Virtus Duff & Phelps Water	AWTAX	1.22	6.4	578	Pursues “water technologies to address the global water crisis,” hence ESG attuned, quality focused, midcap growth, four star	64	51 stocks: Xylem, Severn Trent, United Utilities Group
Invesco Global Water ETF	PIO	0.75	5.9	255	Passively managed, tracks NASDAQ OMX Global Water Index of global water-related companies, midcap growth, three star, no insider investment	54	38 stocks: Ecolab, Roper, Pentair
Fidelity Water Sustainability	FLOWX	0.93%	n/a	105	“Sustainability” targets companies that increase efficiencies, extend life cycles or develop new water tech, hence ESG screened, midcap growth, three star, modest insider investment	66%	35 stocks: Pentair, United Utilities, Severn Trent PLC

Fidelity Water Sustainability does not yet have a five-year record but has substantially outperformed the S&P Global Water index of the past 1- and 3-year periods.

• FLOWX emerges as a top-tier actively managed fund, offering strong returns, ESG alignment, and global diversification. It would be a compelling choice for investors prioritizing sustainability and willing to pay slightly higher fees for active management.
• PHO and FIW remain the leaders in terms of raw performance and cost-efficiency, making them ideal for investors seeking low-cost, U.S.-focused exposure to the water sector. (Which WABAC already tipped us off to.)
• CFWAX and EBLU continue to be strong ESG-focused options, but FLOWX’s slightly higher returns and comparable risk-adjusted performance make it a competitive alternative.
• AWTAX and PIO remain solid choices for global exposure, though they lag slightly behind in performance compared to FLOWX and the U.S.-focused ETFs. It’s hard to project what effect Mr. Trump’s various impulsive rulings will have on global investors.

Bottom Line

When selecting water-oriented funds, you will need to consider factors such as management style (active vs. passive), geographic focus, and ESG alignment. Actively managed funds like FLOWX might offer higher returns but come with higher fees, while passively managed ETFs like PHO and FIW provide cost-effective exposure to the water sector.

In conclusion, water-related mutual funds and ETFs play a crucial role in infrastructure portfolios, offering resilience, growth potential, and alignment with sustainability goals. As climate instability continues to shape global markets, these investments provide a compelling opportunity to address one of the most pressing challenges of our time.

By Charles Lynn Bolin

Uncertainty is in the air. Do you feel it? The price-to-earnings ratio of the S&P 500 is approaching 30 and is within bubble territory which implies below average long-term returns. Thirty-five percent is concentrated in the top ten holdings and 46% is concentrated in the Technology and Financial Sectors.  The economy is stronger than expected and inflation pressures still exist so volatility is high. The yield on the 10-year treasury fell from 4.7% last April to 3.6% in September back up to 4.8% last month and has fallen to 4.6%. Bond investors are expecting rates to remain higher for longer and want to be compensated for duration risk.

President Trump campaigned on the platform of tax cuts which are a stimulus but historically did not pay for the lost revenue, deregulation which would be viewed favorably by the markets, on implementing tariffs which most economists believe are inflationary, on deporting illegal immigrants which could shrink the labor pool and increase inflation, and on cutting Federal spending which would tend to slow growth. Lowering the Federal Funds rate faster would be another stimulus which could increase inflationary pressures. The Treasury started “extraordinary measures” on January 21^st to avoid hitting the debt limit. There are a lot of moving parts, so I got my financial house in order over the past few months.

The S&P 500 has had total returns over the past two years of 50% and as a result, my allocation to stock climbed to 65%. I made no changes to my investment strategy because of the election; however, I have made changes based on high valuations and high interest rates.

Higher For Longer Rates

The Federal Reserve is projecting a cautious approach to lowering short-term rates and still has nearly $6 trillion of longer-duration bonds to find buyers for as Quantitate Tightening continues. The yield curve has steepened as shown by the black line in Figure #1 but is still flat compared to 1992, 2003, and 2010. The blue diamonds represent the FOMC Summary of Economic Projections for the Federal Funds Median Rate at year-end for the next three years. If realized, the short end of the curve will fall very slowly over the next three years benefitting short-term bond prices, but the long end could steepen another one or two percentage points as bond investors demand a higher return for holding bonds with longer durations.

Figure #1:  Yield Curves for 2025, 2010, 2003, and 1992

Figure #2 shows the yield on the ten-year Treasury (blue line, left scale), average ten-year Treasury Yield since 1990 (dotted blue line, left scale), and inflation (black line, left scale). Without Quantitative Easing which lowered long-term rates beginning in 2008, rates will tend to normalize higher. The Federal Debt (red line, right scale) has risen from $3T in 1990 to $35T in 2024 and will add pressure to longer-term yields.

Figure #2:  Ten Year Treasury Yield, Inflation, and National Debt.

The nonpartisan Congressional Budget Office released The Budget and Economic Outlook: 2025 to 2035 which includes the national debt rising by $23.9 trillion over the next decade, excluding additional tax cuts, to $52.0 trillion in 2035 which is 118% of GDP.  

Joachin Klement wrote a post on Substack called A Watershed Moment For Bond Yields. He describes a study by Martin Ademmer and Jamie Rush from Bloomberg evaluating real 10-year bond yields over the last 50 years. Mr. Klement wrote:

“But most importantly, note that the trend real bond yield has started to increase again since 2015. And there are two crucial factors that drive this increase in real bond yield. The increasing deficits of governments and the shift in the global balance between supply and demand for safe assets have both pushed up real bond yields.

This is a watershed moment, we are witnessing here. For the first time in the last 50 years we see evidence that bond markets are demanding a ‘risk premium’ for US Treasuries because supply outstrips demand.”

I will add that Quantitative Tightening is a factor, and two ratings agencies have lowered ratings on US debt. One important thing to keep in mind is that the yield on a 10-year Treasury rising from 0.6% in 2020 to 4.8% currently represents a rise of 700 percent. A rise from 4.8% to 6.0% is only a rise of 25%. Bond prices may be less sensitive to smaller increases. I favor intermediate duration bonds, and will wait and see before investing in long bonds. This puts me in with the bond vigilantes who want to be compensated for duration risk.

Portfolio Adjustments For 2025

Preparing for 2025, I reduced my overall stock-to-bond ratio to around 60% selling equity funds that I manage and withdrawing from balanced portfolios that Fidelity and Vanguard manage to replenish my Safety Bucket for living expenses and emergencies. The final change to my portfolio was to change the strategy of intermediate Bucket #2 conservative sub-portfolios from total return to investing for income. In 2026, if stocks are performing poorly, I will rely on my yield of over 5% and bond ladders will provide steady cash flow. If stocks continue to perform well, I will withdraw from Bucket #2 aggressive sub-portfolios to take more risk off the table.

My overall bond exposure is approximately 60% percent invested in Core Bond, General Bond, International Income, and Money Markets, 20% invested in high-quality bond ladders, 15% in Municipal Bonds, and 10% invested in high yielding bond funds mostly located in Traditional IRAs. All but two of the bond funds that I own have an MFO Risk Rating of Conservative or Very Conservative. My bond portfolio is diversified and has slightly lower quality than the Bloomberg Barclays U.S. Aggregate Bond Index.

Taxable Bonds

I wrote Investing in 2025 And the Coming Decade which included Figure #3 showing Vanguard’s ten-year outlook. Note that Vanguard projects U.S. Treasury Bond returns to be in the range of 4.1%–5.1% but says that more extreme returns are possible. Bond yields have secular trends which I believe will be higher for longer. For the several past months, I have been studying how riskier bond funds perform in different market conditions. “Searching For Yield in All of The Safe Places” covers eight Lipper Categories with high yields and low to moderate risk as inspired by the following chart. I selected high-performing categories and funds based on Risk, Yield, Return, Quality, Trend, and Tax-Efficiency.

Figure #3: Vanguard VCMM 10-Year Return vs Volatility Projections

Vanguard projects that Emerging Market Sovereign bond funds will do well over the next ten years, but they are absent in the categories that I cover because they can be very volatile. Instead of investing directly in emerging market bonds, I invest in actively managed funds in other categories where managers diversify into emerging markets.

Of the Intermediate Buckets that I have set up for income, approximately half is in bond ladders, 25% in core bond holdings yielding 4.7%, and 25% is in the high-yielding funds described in this article yielding 5.4% for a combined yield of 5.1%. I can add to the bond ladder with quality individual non-callable bonds for four to five years with a yield to maturity of 4.5% to 5.0%. The advantage of the bond ladders is that they don’t fluctuate in value if held to maturity.

Table #1 contains one or two of my favorite high-yielding funds from each of the eight Lipper Categories. It is packed with useful information about risk (MFO Risk, MaxDD %, Bear Markets), risk-adjusted return (MFO Rating), returns (APR, Full Cycle), trends (Fund Flow, Exponential Moving Average), quality (Quality, Junk), and expenses (ER, Ferguson Mega Ration), and yield.

Table #1: Author’s Select High Performing Funds Per Lipper Category (2.5 Year Metrics)

Table #2 is an example portfolio where I balanced yield and risk to my liking. The MFO Risk of the portfolio is “Very Conservative”. It would have returned 5.1% APR over the past 2.9 years with a current yield of 6.5% and a maximum drawdown of 4.8%. Note that it has 30% allocated to loan participation funds with 15% in the most conservative Janus Henderson AAA CLO ETF (JAAA). I have room in my own portfolio to increase yield with low risk.

Table #2: Example Yield with Safety Portfolio

Tax Exempt Bonds

One of my objectives is to invest tax efficiently. I own Roth IRAs, and Traditional IRAs, and have accounts for tax efficiency and tax loss harvesting. There is a tradeoff between higher taxable yields and lower tax-exempt yields.

“Searching For High Tax-Exempt Yield” is a companion article this month that describes some high-performing tax-exempt bond funds. Table #3 contains some of my favorite Municipal bond funds in six different Lipper Categories. Tax-exempt yields range from 3% on the low-risk left side of the table to 4% on the higher-risk right side. The article gives some tips for why some investors may choose to invest in Municipal bonds.

Table #3: Author’s Select High Performing Funds Per Lipper Category (3-Year Metrics)

Closing

I don’t anticipate making any major changes to my portfolio in 2025. I expect stocks to perform well but with volatility during the first half of this year and will do a mid-year reassessment then. I have some bonds in my bond ladder maturing that I need to reinvest. I will invest some for liquidity, and roll the rest back into the bond ladder at higher yields and to ensure steady income for the next five to ten years.

I consulted with Financial Advisors at Fidelity and Vanguard on withdrawal strategies and automated an account for investing and withdrawals. If the stock market is high, I plan to withdraw from accounts with high equity ratios, and if the stock market is low, I want to rely on fixed income and bond ladders.