TSP F Fund

The TSP F Fund is a U.S. bond index fund. The fund uses a “passive management” (indexing) investment approach, designed to match the performance of the Bloomberg U.S. Aggregate Bond Index, a broad index representing the U.S. bond market. The F Fund provides broad exposure to U.S. investment grade bonds. It invests about 30 percent in corporate bonds and 70 percent in U.S. government bonds of all maturities.

As of this writing, the Bloomberg U.S. Aggregate Index contains over 10,000 bonds. Its yield to maturity hovers around 3.9%, and the average coupon is 2.6%. The average maturity is 8.9 years, and the average duration is 6.7 years. Some funds tracking the Bloomberg Aggregate index sample the index and hold fewer bonds, but all important risk factors and other characteristics should track the index closely.

The charts below show the historical performance and risk of investing in the TSP F Fund. As of 12/20/2024, the fund has a compound annual growth rate of 5.1%, annualized standard deviation of 4.2%, and Sharpe Ratio of 0.22. An initial investment of $1,000 on 8/31/1990 would today be worth $5,530:

The chart below shows the historical drawdowns for the TSP F Fund. For decades, the drawdowns were in the 4-6% range, but during the high inflation and rising interest rate environment of 2022 that changed dramatically! The worst drawdown since inception so far is -18.0%:

Similar Bond Funds

There are many other mutual funds and ETFs tracking the same index used by the F Fund (the Bloomberg U.S. Aggregate Bond Index). Popular examples include Vanguard's Total Bond Market Index Fund (VBMFX), Vanguard Total Bond Market ETF (BND), and iShares Core U.S. Aggregate Bond ETF (AGG). Many bond investors consider these funds to be their core bond holding (since they invest in all segments and maturities of the fixed income market).

Risks and Potential Rewards of Investing in the F Fund

Bond investors (including investors in the F Fund) are subject to several types of risk, including inflation risk, interest-rate increases, and a potential default by the issuer of one or more of the bonds in the portfolio. Lets take a look at these in greater detail:

• Inflation risk: the bond portfolio's nominal return may not be sufficiently high enough to offset the reduction in purchasing power that results from inflation.
• Interest rate risk: an increase in interest rates may lead to a decrease in the price of the bonds in the portfolio. Investors should carefully weigh this risk, since interest rates have been declining for decades and are currently near all-time lows.
• Credit risk: a company or government's credit quality could wane, and you (as a bondholder) could lose some or all of your investment.
• Income risk: the fund's income may decline because of falling interest rates.

Although there are several types of risks associated with the F Fund, the overall risk is relatively low, because the F Fund holds a very diversified portfolio of high grade (investment grade) bonds. F Fund investors have the opportunity to earn higher long-term returns compared to investors in short-term securities such as the TSP G Fund.

How to use the F Fund in a TSP account

The prices of bonds and stocks don't always move in tandem. In fact, investment grade bonds are often uncorrelated or negatively correlated to stocks (bonds zig when stocks zag, and vice versa). A retirement portfolio that contains an allocation to bond funds like the TSP F Fund, in addition to stock funds like the TSP C, I, and S funds, will typically be less volatile than one that contains only stock funds.

In our tactical asset allocation strategies, we dynamically allocate a portion of investable assets to the TSP F Fund, based on the prevailing market conditions.