Boost your yield with ultra-short bond funds

Savings can generally be divided into two pots: cash that must be shielded from losses and money that can tolerate a little investment risk. Short-term savings that fall into the first category should reside in federally insured deposit accounts. Top-yielding savings accounts and oneyear certificates of deposit are earning 1 percent or more.

But maybe you have, say, interest and dividend income that you’re holding to invest later. Money that you put in a high-yielding insured account may not be as readily available as cash in an account that’s tied directly to your brokerage accounts. But money market mutual funds are currently yielding next to nothing.

Ultra-short bond funds provide an opportunity to earn a better yield without incurring much more risk. The average maturity of fund holdings is often about a year. So although yields are lower than those of longer-term bond funds, the funds are less vulnerable to rising interest rates (when interest rates increase, bond prices fall).

Watch out, though, for high expenses, which can eat into gains. And look for funds that hold mostly high-quality debt, such as government-backed bonds and investment-grade corporate bonds.

Baird Ultra Short Bond Investor (symbol BUBSX) invests in shortterm Treasury bonds and low-risk corporate bonds and mortgages; it has a 0.40 percent expense ratio and recently yielded 0.7 percent. Northern UltraShort Fixed Income Fund (NUSFX), with annual expenses of 0.25 percent and a 0.7 percent yield, holds a solid mix that includes corporate bonds and Treasuries. Vanguard’s new Ultra-Short-Term Bond (VUBFX) invests in high-quality debt, with a 0.5 percent yield and a low 0.20 percent expense ratio.