Highest returns at biggest corporate bond funds

Compared with the U.S. government bond market, there are options for potentially stronger fixed-income returns — from the corporate world.

We reviewed all corporate bond funds with more than $500 million in assets and ranked them by their three-year returns. The average was 3.89%, higher than the returns from government bonds, of course, since there is more risk involved. While government debt carries interest rate and inflation risk, corporate bonds also carry default and downgrade risk. That means greater potential for losses. In the past decade, government bond funds tended to have just one down year, compared with two for many corporate bond funds.

Since corporate bonds are pegged to an underlying issuer, their risk/reward balance behaves more like stocks. Indeed, equities carry the most risk since they're lowest on the capital structure, and offer the highest potential rewards — 8% over the past three years, as measured by the S&P 500.

To qualify for our list, these portfolios must hold more than 65% of their assets in corporate bonds, less than 40% in foreign bonds and less than 35% in high-yield bonds. All data from Morningstar Direct.