Vanguard may have risen to prominence on the success of its low-cost, highly diversified equity mutual funds and exchange-traded funds, or ETFs, but in recent years the firm has also become a powerhouse in the fixed-income world.
Currently, Vanguard sports over 100 bond mutual funds and ETFs, spanning the full spectrum of maturity, credit quality, regions and issuer type. Investors of all risk tolerances, time horizons, objectives and tax brackets can easily find the ideal bond fund for their needs.
“Vanguard’s bond fund lineup covers a wide range of bond types, including government bonds, corporate bonds, municipal bonds and international bonds,” says Wes Moss, managing partner and chief investment strategist at Capital Investment Advisors. “This breadth of options allows investors to create a well-diversified bond portfolio tailored to their specific investment goals and risk tolerance.”
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Despite not having the stature in institutional fixed-income management of dedicated bond firms like Pimco or Nuveen, Vanguard’s bond fund lineup has nonetheless become popular among retail investors for one simple reason: low fees.
“As with most things Vanguard, they are widely known as the low-cost fund provider when compared to their peers,” says Moss. “When you keep your investment fees lower, you can improve total returns.”
Here’s a look at seven of the best Vanguard bond mutual funds and ETFs to buy in 2023:
| Fund | Expense ratio |
| Vanguard Total Bond Market Index Fund Admiral Shares (ticker: VBTLX) | 0.05% |
| Vanguard Total Bond Market ETF (BND) | 0.03% |
| Vanguard Tax-Exempt Bond Index Fund Admiral Shares (VTEAX) | 0.09% |
| Vanguard Short-Term Treasury ETF (VGSH) | 0.04% |
| Vanguard High-Yield Corporate Fund Investor Shares (VWEHX) | 0.23% |
| Vanguard Ultra-Short Bond ETF (VUSB) | 0.10% |
| Vanguard Total International Bond ETF (BNDX) | 0.07% |
Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)
A popular “one size fits all” bond fund for many passive investors is VBTLX. “This fund provides diversified exposure to various sectors and maturities within the bond market by tracking the Bloomberg U.S. Aggregate Float Adjusted Index, which represents the broad U.S. investment-grade bond market,” says Michael Ashley Schulman, partner and chief investment officer at Running Point Capital Advisors.
VBTLX is like the Goldilocks of bond funds in that it sits “just right” in terms of issuer, maturity and credit quality diversification. It includes both government Treasurys and investment-grade corporate bonds, bonds rated BBB to AAA by S&P Global, and bonds with maturities ranging from under one year to over 25 years. The fund averages out to an intermediate duration of 6.6 years.
Vanguard Total Bond Market ETF (BND)
As a mutual fund, the net asset value, or NAV, of VBTLX is calculated once per day at market close, and this is the only time investors can buy in. In addition, Vanguard “Admiral Share” class mutual funds like VBTLX impose a minimum investment requirement, which in this case is $3,000. For investors looking to trade throughout the day or avoid the minimum investment requirement, an ETF like BND may be a better choice.
BND is essentially the ETF equivalent of VBTLX. The ETF tracks the exact same index, holds virtually the same bonds and has very similar portfolio metrics. This includes an intermediate duration of 6.6 years, which implies a loss or gain of roughly 6.6% if interest rates rose or fell by 1%, all else being equal. BND also undercuts VBTLX slightly with a lower expense ratio of 0.03%, or $3 for every $10,000 invested annually.
Vanguard Tax-Exempt Bond Index Fund Admiral Shares (VTEAX)
“Another question to ask when considering bond funds for your portfolio is whether you’re investing outside of an individual retirement account or other tax-advantaged retirement account,” says Chris Tidmore, senior manager at Vanguard’s Investment Advisory Research Center. “If you’re in a high tax bracket and investing outside of your retirement account, a tax-exempt bond fund could help reduce tax exposure.”
A great pick here is VTEAX, which primarily holds municipal bonds by sampling the S&P National AMT-Free Municipal Bond Index. These bonds pay out income that is exempt from federal income taxes and the federal alternative minimum tax, making them a viable pick for a taxable account. VTEAX has an average duration of 5.5 years.
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Vanguard Short-Term Treasury ETF (VGSH)
“Investors need to understand the two main types of risk inherent in fixed-income investing before selecting a bond fund,” Tidmore says. “Bond funds with long-term maturities are more sensitive to changes in interest rates, while a lower credit quality in the underlying bonds also impacts the riskiness of a particular fund.” By adjusting these two metrics, investors can tailor their risk as they see fit.
For investors looking to minimize both interest rate and credit risk, VGSH may be ideal. This ETF only holds AAA-rated U.S. government issued Treasury bonds, which are virtually risk-free in terms of default. By only holding short-term Treasurys with one to three years until maturity, VGSH is also able to maintain a low average duration of 1.9 year and reduce its interest-rate sensitivity.
Vanguard High-Yield Corporate Fund Investor Shares (VWEHX)
On the other side of the risk-reward spectrum in terms of credit risk is VWEHX. “This fund aims to provide potentially higher income through exposure to bonds with higher credit risk by investing in lower-rated, high-yield corporate bonds,” Schulman says. “High-yield bonds, also known as junk bond funds, typically carry higher credit risk but may offer higher yields to compensate for it.”
VWEHX has been around since 1978 and has historically yielded volatility similar to that of the stock market. During bad historical market crashes like 2008 and 2020, VWEHX has suffered significant losses. The upside is a much higher yield to maturity of 6.9%, a measure of return if all of VWEHX’s underlying bonds were held to maturity.
Vanguard Ultra-Short Bond ETF (VUSB)
“Vanguard also offers a range of actively managed bond funds, which aim to outperform their benchmark and are known for their relatively low fees compared to their peers,” Moss says. Whereas passively managed bond funds are restricted to tracking the holdings of an index, active bond funds are unconstrained and free to explore new sources of risk and return. A great example is VUSB, which offers low-risk income.
As an actively managed bond ETF, VUSB is free to target a diversified portfolio of high- and medium-quality, short-term fixed-income securities to meet its goals of low volatility and above-average income. The ETF currently pays a high yield to maturity of 5.5% against a low average effective maturity of 0.9 years, thanks to its ability to hold higher-yielding bonds rated A and BBB.
Vanguard Total International Bond ETF (BNDX)
“BNDX offers diversification benefits by including investment-grade bonds issued by governments and corporations outside the United States, and thus provides exposure to international bonds denominated in various currencies,” Schulman says. By buying BNDX, investors can hedge against the risk of a catastrophic event hitting the U.S. bond market, like a sovereign default or credit crisis.
BNDX tracks the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index, which is also hedged to the U.S. dollar to mitigate the volatility associated with foreign exchange rate fluctuations. The ETF holds over 6,800 bonds from countries like Japan, France, Germany, Italy, Canada, the U.K. and Australia.
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7 Best Vanguard Bond Funds to Buy originally appeared on usnews.com
Update 05/04/23: This story was previously published at an earlier date and has been updated with new information.
