The Big Screen: Bond Funds That Can Keep You Afloat

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The tide of cash gushing into bond funds is rising, and today the Big Screen is here to help you choose wisely.

Even before the Sept. 11 terrorist attacks, bond funds were beating stock funds handily. They had netted about $50 billion in 2001 inflows, about 10 times that of stock funds, according to liquidity tracker TrimTabs.com. No doubt the buy-bonds trend has continued since then, judging by stocks' performance over the past week. We've shown you how adding bond funds to a stock portfolio can whittle volatility while preserving returns, though bonds are far from riskless themselves. (For more on getting starting in bond investing, check out this primer.)

Money and confidence have drained from the bond market since the attacks, making funds that sink your money into below-investment-grade or junk bonds particularly vulnerable. If you're sitting with a stock-sick portfolio and already have an emergency stash equal to three months' expenses in the bank, these bond funds should work as a core holding for just about any investor.

We sifted vanilla intermediate-term bond funds, which spread their money among U.S. government and higher-quality corporate bonds. First, we yanked out any funds that didn't beat their average peer over the past one, three and five years. Then we removed any funds with volatility or expenses above the category average -- high expenses are particularly erosive with bond funds, where returns are typically lower than stock funds. Finally, we pulled out funds with more than 5% of their money in junk bonds, as well as those that are closed to new investors or carrying a high investment minimum. ...