When it comes to fixed income, firms like Nuveen and Pimco often dominate the conversation, the latter having the distinction of being co-founded by renowned investor Bill Gross, who is also known as “the Bond King.” These firms have historically been benchmarks of excellence in bond fund management.
However, Vanguard has been gaining ground, not through headline-grabbing trades but by delivering what retail investors seek: diversified portfolios, a broad selection of funds and competitive fees.
Vanguard’s assortment of bond funds is expansive, featuring 110 fixed-income offerings. Of these, 89 are mutual funds and 21 are exchange-traded funds (ETFs), making Vanguard a prominent figure in the bond fund market. Some come with expense ratios as low as 0.03%, or just $3 in annual fees for a $10,000 investment.
“As with most things Vanguard, they are widely known as the low-cost fund provider when compared to their peers,” says Wes Moss, managing partner and chief investment strategist at Capital Investment Advisors. “When you keep your investment fees lower, you can improve total returns.”
While some funds are reserved for institutional clients, the majority are readily available to retail investors, providing easy access to the bond market. Overall, investors can expect a very extensive bond fund lineup that allows for great customization.
“Vanguard’s bond fund lineup covers a wide range of bond types, including government bonds, corporate bonds, municipal bonds and international bonds,” Moss says. “This breadth of options allows investors to create a well-diversified bond portfolio tailored to their specific investment goals and risk tolerance.”
In addition, while Vanguard has carved a niche for itself as the purveyor of low-cost index funds, it’s also gaining traction with actively managed fixed-income funds, all while maintaining a steadfast commitment to keeping investor costs low.
“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.
Here are seven of the best Vanguard bond mutual funds and ETFs to buy in 2023:
| ETF | Expense Ratio |
| Vanguard Total Bond Market Index Fund Admiral Shares (ticker: VBTLX) | 0.05% |
| Vanguard Total International Bond ETF (BNDX) | 0.07% |
| Vanguard High-Yield Corporate Fund Investor Shares (VWEHX) | 0.23% |
| Vanguard Long-Term Corporate Bond ETF (VCLT) | 0.04% |
| Vanguard Short-Term Treasury ETF (VGSH) | 0.04% |
| Vanguard Tax-Exempt Bond Index Fund Admiral Shares (VTEAX) | 0.09% |
| Vanguard Ultra-Short Bond ETF (VUSB) | 0.10% |
Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)
For a straightforward and broad approach to bond investing, consider VBTLX. This mutual fund tracks a variant of the Bloomberg U.S. Aggregate Bond Index, which provides exposure to more than 10,000 U.S. government, mortgage-backed and investment-grade bonds of multiple maturities. It is also available in an ETF as the Vanguard Total Bond Market ETF (BND) for a price of around $69 per share.
Currently, VBTLX offers an average yield to maturity, or YTM, of 5.3%, which is the on-paper returns investors can expect if all of its underlying bonds are held until maturity. It also sports an average duration of 6.3 years meaning that if interest rates rose by one percentage point, VBTLX would lose 6.3% in value, all else being equal. The fund charges a 0.05% expense ratio.
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,” says Michael Ashley Schulman, partner and chief investment officer at Running Point Capital Advisors. The ETF is also fairly cost effective with a 0.07% expense ratio.
BNDX currently tracks the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index, which holds some 7,000-plus bonds from countries like Japan, France, Germany, Italy, the U.K., Canada and more. The ETF is currency hedged to mitigate the volatility from fluctuating exchange rates. Investors can currently expect a 5.4% YTM and a 7.1-year average duration.
Vanguard High-Yield Corporate Fund Investor Shares (VWEHX)
Not all of Vanguard’s bond funds are passive index-tracking products. Some like VWEHX are actively managed, meaning that Vanguard’s fixed-income team selects their holdings based on their own criteria and methodology. “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.
VWEHX is therefore an example of a “junk bond” fund. However, Vanguard’s team still looks to hold the higher-rated bonds in this category. By taking on greater default risk, VWEHX is able to deliver a high 7.8% YTM despite a lower average duration of 3.7 years. However, be aware that this fund charges a higher 0.23% expense ratio and requires a $3,000 minimum investment.
Vanguard Long-Term Corporate Bond ETF (VCLT)
“Investors need to understand the two main types of risk inherent in fixed-income investing before selecting a bond fund,” says Chris Tidmore, senior manager at Vanguard’s Investment Advisory Research Center. “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.”
Investors looking to ramp up the risk and return relationship for both of these metrics can use VCLT. By tracking the Bloomberg U.S. 10+ Year Corporate Bond Index, VCLT targets investment-grade-rated corporate bonds on the far end of the yield curve. Currently investors can expect a YTM of 6.1% against an average duration of 12.5 years. VCLT charges a 0.04% expense ratio.
Vanguard Short-Term Treasury ETF (VGSH)
VGSH stands in contrast to VCLT, presenting a markedly different risk and return profile. This ETF focuses on the shorter end of the yield curve, investing in U.S. Treasury securities, which are considered among the safest bonds due to their backing by the full faith and credit of the U.S. government. By prioritizing securities with shorter maturities, the fund also exhibits less sensitivity to interest rate fluctuations.
While investors in VCLT can reach for the highest yields by taking on greater credit and interest rate risk, investors in VGSH are essentially doing the opposite. The latter currently pays a decent YTM of 5.1% thanks to elevated short-term bond yields and is only exposed to 1.9 years of average duration. VGSH also charges a low 0.04% expense ratio.
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,” Tidmore says. “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 example is VTEAX, which charges a 0.09% expense ratio.
This ETF is benchmarked to the Standard & Poor’s National AMT-Free Municipal Bond Index, sampling the index’s holdings to track its performance. By doing so, VTEAX currently holds some 7,400 municipal bonds exempt from both federal income tax and the federal alternative minimum tax. Investors can expect a 4.3% YTM and a 6.3-year average duration.
Vanguard Ultra-Short Bond ETF (VUSB)
Investors looking to outperform the expected yield from the average money market fund can consider an actively managed ultra-short-term bond ETF like VUSB. This ETF selects a portfolio of asset-backed, government and investment-grade corporate bonds with a focus on high quality and short maturity. The goal of this ETF is to provide both competitive income and capital preservation.
With an average duration of just 0.9 years, VUSB is very insulated from the negative effects of rising interest rates. It also manages to deliver a very competitive 5.9% YTM. However, keep in mind that unlike a money market fund, the price of this ETF can fluctuate and is more susceptible to losses in the event of major market turmoil. VUSB charges a 0.1% expense ratio.
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7 Best Vanguard Bond Funds to Buy originally appeared on usnews.com
Update 11/06/23: This story was previously published at an earlier date and has been updated with new information.
