To find our picks for the best high-yield bond funds, we utilized the Fidelity Investments screener. Our starting list was 381 funds, including both taxable and tax-exempt municipal bond mutual funds. Next, we ruled out all funds with expense ratios greater than 0.70%, which narrowed the list to 77 funds.
That group included many institutional class funds with minimum initial investments of at least $100,000 to $1 million. We eliminated funds requiring initial investments over $3,000. Some workplace retirement plans waive the minimums for employees, but we avoided funds with sky-high minimums—and employee-only, Class Z, funds—to ensure our picks were easily accessible for all. We also excluded funds that charge 12b-1 fees or front end loads, so-called Class A shares.
We soon had a tentative list of 15 funds, which gave way to our final list of 10. That final list is a diversified lineup of high-yield bond funds. Their fees are relatively low. Their yields rank high among their peers, though several take somewhat higher credit risks to achieve those income streams.
Remember, bond interest is typically taxed as ordinary income. But high-yield municipal bond mutual funds are federally tax exempt. It’s generally best to own funds like that in a taxable account, like a regular brokerage account. Why waste the tax shelter nature of retirement accounts on a fund whose income is already tax exempt?