Key Takeaways
- Bond returns cooled in the second quarter, as investors worried about the inflationary impact of tariffs and the growing federal budget deficit.
- The actively managed Vanguard Short-Term Investment-Grade Bond Fund outperformed, while the PIMCO Total Return Fund fell behind its peers.
- The Vanguard Intermediate-Term Corporate Bond ETF ranked in the top decile of its category, while the iShares 20+ Year Treasury Bond ETF lagged.
The largest active bond funds were generally strong in the second quarter, as much of the bond market registered positive returns amid widespread volatility.
Out of the 10 most-widely held active bond funds, three landed in the top quarter of their categories during the quarter. The $52.5 billion Vanguard Short-Term Investment Grade Fund VFSIX ranked in the 11th percentile with a 1.9% return. Four of the largest active bond funds placed in the bottom half of their categories in the second quarter, with the worst-performing being the $44 billion PIMCO Total Return Fund PTTRX, which landed in the 81st percentile of intermediate-core plus bond funds.
Among the 10 most widely held bond index funds, performance within Morningstar categories was more muted during the second quarter. The $55.2 billion Vanguard Intermediate-Term Corporate Bond ETF VCIT ranked in the 5th percentile of its category, thanks to a 2.6% gain, but no others ranked in the top quartile. Meanwhile, the $48.9 billion iShares 20+ Year Treasury Bond ETF TLT ranked in the 77th of its category, with five other funds in the bottom half of their categories.
When it came to absolute returns, the 10 largest active bond funds and all but one of the 10 largest passive funds were in positive territory during the quarter, as most bond fund categories posted gains. The $352 billion Vanguard Total Bond Marker Index Fund VTBSX, the largest bond fund, rose 1.3%.
Among Morningstar’s bond fund categories, only those focused on long-term Treasury bonds, high-yield municipal bonds, or long-term municipal bonds posted losses. Funds focused on riskier corners of the market or those that more closely track equities, such as high-yield bonds, posted the strongest gains.
The Largest Active Bond Funds: The Best Q2 Performers
Each quarter, we review the short- and long-term performance of the largest active bond funds and largest index-tracking funds. Many of these funds, such as the Vanguard Total Bond Market Index Fund, are core holdings in many investor portfolios, especially retirement accounts. This list of funds includes both traditional mutual funds and exchange-traded funds. The list includes the funds that were the largest as of the beginning of the second quarter.
Performance data for this article was based on the lowest-cost share class for each fund. Some funds may be listed with share classes not accessible to individual investors outside retirement plans. The individual investor versions of those funds may carry higher fees, reducing returns to shareholders. For longer-term returns, if a share class was launched more recently than the period mentioned, an older share class was substituted if one exists.
During the quarter, based on category ranking, the best-performing of these funds was the Bronze-rated Vanguard Short-Term Investment-Grade Bond Fund. It was in the 11th percentile of the short-term bond category with a 1.9% return. “The process is consistent. The firm’s senior investment and taxable strategy committees shape macroeconomic views, setting broad risk parameters around duration, sector allocation, and credit outlook,” writes Morningstar associate analyst Ken Noguchi. “Despite its solid process, the managers typically keep most assets to corporate debt, making this fund a less sector-diversified option than many short-term bond category peers.”
When it came to absolute returns, the quarter’s best performer among these funds was the PIMCO Income Fund PIMIX. The Gold-rated fund, which has $182 billion in assets, returned 2.2%, leaving it in the 46th percentile of the multisector bond category. “This strategy benefits from numerous advantages thanks to Pimco’s heft and prowess,” writes Morningstar senior principal Eric Jacobson.
The Largest Active Bond Funds: The Worst Q2 Performers
In a quarter when the majority of the largest active bond funds turned in relatively solid performances, the biggest laggard on a relative basis was the Gold-rated PIMCO Total Return Fund. Which was in the 81st percentile of the intermediate core-plus category with a 1.2% return. “Pimco Total Return is using a broader range of tools, but with a rigor that draws on the firm’s strengths,” writes Morningstar principal Brian Moriarty.
The Vanguard Intermediate-Term Tax-Exempt Fund VWIUX, which carries a Gold Morningstar Medalist Rating and has $76.8 billion in assets, chalked up the lowest absolute return with a 0.5% return, but that gain placed the fund in the 25th percentile of the municipal national intermediate category. “The fund’s experienced leaders employ a disciplined approach to create a diversified portfolio while its ultralow fee consistently gives them an edge over peers,” says Noguchi.
The Largest Bond Index Funds: The Best Q2 Performers
By their nature, the performance of the largest index funds largely mirrors those of the corners of the bond market they are designed to track. During the second quarter, long-term bond yields rose amid concerns about the inflationary impact of US President Donald Trump’s tariffs and the ballooning federal budget deficit.
In addition, global investors grew concerned about the role of the US bond market as a safe haven, potentially demanding higher yields from the US than in the past. Meanwhile, short-term bonds outperformed, as did riskier corners of the market.
Among the largest index funds, the best performance on a relative basis within a category came from the Gold-rated Vanguard Intermediate-Term Corporate Bond ETF, which finished the quarter in the 5th percentile of the corporate bond category with a 2.6% return. This strategy was also the best performer among the group when it came to overall returns in the quarter.
With a focus on bonds that mature in five to 10 years, the fund “tends to overweight higher-quality bonds compared to its average Morningstar Category peer,” says Morningstar analyst Lan Anh Tran. “The fund’s low fee and broad portfolio contributed to its excess returns, and its tilt toward quality and lower duration also worked to its benefit. Most recently, it outpaced the category average by 1 percentage point during the first five months of 2025 as investors flocked to safer assets amid volatility in the market. The fund remains a precise tool for investors targeting high-quality, intermediate-term corporate bonds.”
The Largest Bond Index Funds: The Worst Q2 Performers
In an up-quarter across most of the bond market, long-term treasuries lagged. The Bronze-Rated iShares 20+ Year Treasury Bond ETF was not only the lowest performer relative to its category, landing in the 77th percentile of the long government category, but it was also the only fund to lose value during the quarter, racking up a 2% loss. Morningstar analysts do not cover the fund.
The Long-Term Performance of the Largest Active Bond Funds
Funds are best evaluated over years, through different market cycles and against their peers or benchmarks. Over the past three years, performance among the 10 largest active funds has been solid, with all but one landing in the top half of their categories.
The strongest relative three-year track record belongs to the $95 billion Dodge & Cox Income fund, DOXIX. The Gold-rated fund ranked in the 12th percentile at the end of the second quarter. The fund, which falls in the intermediate core-plus bond category, has returned 4.4% per year for the last three years. “The managers know what they’re good at, and they stick to it” writes Morningstar senior principal Mara Dobrescu. “They invest with a three-to-five-year investment horizon and view income as an important driver of long-term returns, so they aim to assemble a portfolio that delivers more yield than the index. A tilt toward corporates has made this strategy more sensitive to credit market swings, though it typically rebounds sharply from such setbacks.”
Strategic Advisers Fidelity Core Income FIWGX, with $80.8 billion in assets and a Silver Medalist Rating, brings up the rear, being the only fund to underperform its category over the past three years. Its 3.3% average annual return puts it in the 52nd percentile of the intermediate core-plus category. Morningstar analysts do not cover the fund.
The Long-Term Performance of the Largest Bond Index Funds
Among index-tracking strategies, three-year returns are less consistent, with two funds in the top quintile and six in the bottom half of their categories. The worst performer on a relative basis is the Vanguard Short-Term Bond ETF, which ranks in the 88th percentile of the short-term bond category. The $64 billion Vanguard strategy has returned 3.7% per year over the last three years.
The top performer within its category during the quarter was the Vanguard Intermediate-Term Corporate Bond ETF, which ranked in the 11th percentile with a 5.3% average annual return.