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Bond fund investors often favor the safety of traditional government securities and investment-grade corporate bonds. But with many funds offering paltry yields, investors might consider shifting some of their bond portfolios into less-conventional sectors. Below, we cover three attractive alternatives suitable for most investors.

High-Yield Bonds

High-yield bonds are a euphemism for junk bonds, the debt issued by companies unable to earn an investment-grade credit rating. Looking ahead, robust demand amid a rebounding economy bodes well for high-yield bonds, which tend to be sensitive to the outlook for economic growth.

Vanguard High-Yield Corporate (VWEHX) is a longtime favorite and member of our recommended Growth and Conservative portfolios. Yielding 4.2%, the fund sports an average credit quality of BB, versus B for the category. Up 3.4% in 2021, the fund has had two down years over the last 10, including a 3% dip in 2018.

Inflation-Protected Bonds

Treasury inflation-protected securities, or TIPS, are in demand as inflation fears persist and consumer prices move higher. TIPS principal and interest-rate payments rise and fall along with inflation.

Best suited for long-term investors, TIPS funds tend to be more sensitive to interest-rate fluctuations — upward-trending rates could hurt performance. And during periods of inflation, other bonds often offer higher yields.

Yielding 3.7%, Schwab U.S. TIPS (SCHP) invests in 47 securities. The fund is up 5.8% this year and boasts a five-year annualized return of 4.9%, ranking it among the top 27% of its category. The worst showing since its inception in 2010 was a decline of 8.9% in 2013.

World Bonds

World bond funds, which favor investment-grade bonds, can help diversify a U.S. bond portfolio. Like other bonds, foreign bonds face interest-rate and credit risk. They’re also subject to currency, political, and country risks. Still, a rebounding global economy has helped lift growth expectations and aided corporate bonds.

Dodge & Cox Global Bond (DODLX) is a top pick and a member of our recommended fund portfolios. While U.S. bonds represent about 55% of the portfolio, it is 16% invested in Latin America and 14% in Europe. Yielding 2.2%, the fund has dipped 0.3% this year but has a five-year annualized return of 5.7%.