Investors are piling into bond funds as 2020 winds down. As one of the biggest fund companies by assets under management, Vanguard’s bond funds have likely received much of investors’ savings.
Refinitiv’s Lipper U.S. Fund Flows report for the week of Dec. 2 showed net inflows of $4.1 billion for all taxable bond funds, with corporate investment-grade bonds seeing the biggest inflows. Refinitiv’s data for the past month showed strong inflows into taxable bonds versus outflows for equities.
These strong inflows come despite the Federal Reserve cutting interest rates to historically low levels. Experts say investors are looking to bonds as a ballast and source of portfolio diversity due to volatile equity prices. That may be one reason people are choosing to invest in mutual funds and exchange-traded funds, such as Vanguard’s bond index funds and actively managed bonds funds. Here are seven of the best Vanguard bond funds to buy:
— Vanguard Total Bond Market ETF (ticker: BND)
— Vanguard Long-Term Treasury ETF (VGLT)
— Vanguard Short-Term Corporate Bond ETF (VCSH)
— Vanguard Intermediate-Term Corporate Bond ETF (VCIT)
— Vanguard Long-Term Corporate Bond ETF (VCLT)
— Vanguard Mortgage-Backed Securities ETF (VMBS)
— Vanguard Tax-Exempt Bond ETF (VTEB)
The Popularity of Vanguard Bond Funds
John Mantia, director of finance at PARCO, says his firm looks at different fund family offerings and tries to find the best of what’s out there on a fee-adjusted basis. Vanguard’s bond funds are some of the best and cheapest around, he says.
“We like Vanguard in particular on the bond side because it’s a very efficient way to get that exposure,” Mantia says, especially with interest-rate yields so low.
Many of Vanguard’s index fund fees overall are some of the lowest around, with ETF fees averaging 0.06%, or $6 for every $10,000 invested annually. Its mutual funds are also cheaper than many other fund houses, with an average expense ratio of around 0.1%. Additionally, many of Vanguard’s mutual funds are available as ETFs — so if the mutual fund is closed to new investors, consider using the ETF version.
Vanguard Total Bond Market ETF (BND)
Mantia says for clients who want steady, safe exposure for their cash allocation, he looks to government bonds, and BND gives investors broad exposure to the taxable investment-grade, U.S. dollar-denominated bond market. The average effective maturity is 8.5 years, right in line with the benchmark Bloomberg Barclays U.S. Aggregate Float Adjusted Index. U.S. News ranks BND as No. 9 for intermediate core bond ETFs among passively managed funds for long-term investors. BND is the ETF version of the popular Vanguard Total Bond Market Index Fund ( VBMFX), which is currently closed to new investors.
Vanguard Long-Term Treasury ETF (VGLT)
For his clients who want to have longer-dated government bond exposure, Mantia uses VGLT. The fund tracks the Bloomberg Barclays U.S. Long Treasury Bond Index. As the name suggests, it invests in U.S. Treasury bonds and it keeps the dollar-weighted average maturity between 10 and 25 years. It has a 12-month yield of 1.9% and a sizable $2.4 billion in assets under management. U.S. News lists VGLT as No. 4 for government bond ETFs among passively managed funds for long-term investors.
Vanguard Short-Term Corporate Bond ETF (VCSH)
Investors who want a little bit more yield than what government bonds offer can look to corporate bonds. Brad Gregory, portfolio manager at Buckingham Advisors, uses VCSH to gain exposure to corporate bonds within a portfolio’s fixed-income allocation. “Although not flashy, this index fund provides stability and liquidity to what we consider the ‘safety’ piece of a portfolio,” Gregory says. The fund invests in short-term, investment-grade corporate bonds, with a dollar-weighted average maturity of one to five years, which gives the fund stability, he says. Year to date, the fund’s total return is 4.7%, with a 12-month yield of 2.4%.
Vanguard Intermediate-Term Corporate Bond (VCIT)
Mantia also likes some corporate bonds. VCIT holds corporate bonds that have an expiration between five to 10 years. The ETF’s average duration is 6.4 years, with an effective maturity of 7.5 years. VCIT has a 12-month yield of 2.7%. Year to date, the fund’s total return is 8.8%, which puts it ahead of half of its peers. The fund overall has a credit rating of BBB, higher than the category average credit rating of BB. VCIT follows the Bloomberg Barclays U.S. 5-10 Year Corporate Bond Index. “We find a lot of our clients are quite comfortable knowing they’re in a Vanguard fund, rather than something maybe they’re less familiar with,” Mantia says.
Vanguard Long-Term Corporate Bond Index (VCLT)
VCLT is another corporate-bond choice for income, Mantia says. The fund tracks the Bloomberg Barclays U.S. 10+ Year Corporate Index, a market value-weighted index that holds U.S. investment-grade corporate bonds with at least 10 years remaining to maturity. Because this is a long-term fund, VCLT seeks a dollar-weighted average maturity of 10 to 25 years — but it has an average duration of nearly 15 years, so it’s in the middle of the average maturity range. At about 50%, VCLT has a higher amount of BBB-rated holdings than other funds in this category.
[Read: The Ultimate Guide to Bonds.]
Vanguard Mortgage-Backed Securities ETF (VMBS)
Given the combination of low interest rates and the uneven economy, investors need a safe place to earn whatever income they can, says Chuck Self, chief investment officer at iSectors. His choice is VMBS. As he notes, the fund invests in a broadly diversified group of the U.S. agencies that guarantee residential mortgages: Ginnie Mae, Fannie Mae and Freddie Mac. “These agencies currently have an explicit guarantee from the U.S. government, so there is next to no chances for defaults,” Self says. “This fund should be a core holding in any investor’s bond portfolio.”
Vanguard Tax-Exempt Bond ETF (VTEB)
Self also likes VTEB for high-tax-bracket investors. The portfolio reflects the investment-grade municipal markets as more than 90% of the holdings are rated A or better by major credit ratings agencies. He points out that the average maturity is around 14 years and the fund has a 1.3% tax-free yield to maturity, which is higher than U.S. Treasurys, whose interest is taxable. “On a taxable-equivalent basis, the yield is 2.06% for an investor in the 35% tax bracket, which compares favorably to investment-grade taxable bonds with the same maturity,” Self says. Municipal bond yields have risen because of concerns about pandemic-based income and sales-tax revenue shortfalls. Self expects that after President-elect Joe Biden takes office, the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, will be extended “to provide significant help to state and local government to address revenue shortfalls until the pandemic is under control.”
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Update 12/07/20: This story was published previously and has been updated with new information.