Vanguard, a household name among investors, is renowned not just for its extensive lineup of low-cost, passively managed index funds offering stock exposure, but also for its robust presence in the fixed-income sector.
Today, with expense ratios as low as 0.03%, or $3 annually in fees for a $10,000 investment, investors can use Vanguard bond funds to diversify a portfolio without breaking the bank.
“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.”
The firm has been a longstanding pioneer in bond investing: Back in 1986, Vanguard introduced the mutual fund industry’s first bond index fund. This innovation provided investors with passive and affordable access to a broad spectrum of U.S. investment-grade corporate bonds and government Treasuries.
Currently, Vanguard boasts an impressive array of 112 fixed-income mutual funds and exchange-traded funds, or ETFs. These funds offer exposure to bonds from a variety of issuers, geographies, credit qualities and maturities, catering to a wide range of investment needs and preferences.
“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.”
Another notable feature of Vanguard’s bond funds is their accessibility. Each fund’s webpage provides clear and detailed information on crucial metrics such as credit quality, maturity ranges, duration, yield to maturity and expenses.
This transparency and ease of access are a significant advantage over the complexities of trading individual bonds, where calculating these metrics can be challenging for many investors.
Additionally, many of Vanguard’s bond funds distribute income on a monthly basis, offering a more frequent payout compared to the semi-annual payments typical of individual bonds.
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This feature makes Vanguard’s bond funds an attractive choice for investors looking to generate regular income while mitigating portfolio volatility.
Here are seven of the best Vanguard bond mutual funds and ETFs to buy in 2023:
| Bond ETF | Expense Ratio | Yield to maturity |
| Vanguard Total Bond Market ETF (ticker: BND) | 0.03% | 5% |
| Vanguard Total International Bond ETF (BNDX) | 0.07% | 5.3% |
| Vanguard Long-Term Treasury ETF (VGLT) | 0.04% | 4.7% |
| Vanguard Short-Term Corporate Bond ETF (VCSH) | 0.04% | 5.5% |
| Vanguard High-Yield Tax-Exempt Fund Investor Shares (VWAHX) | 0.17% | 4.7% |
| Vanguard Core-Plus Bond Fund Investor Shares (VCPIX) | 0.30% | 5.7% |
| Vanguard Core-Plus Bond ETF (VPLS) | 0.20% | 4.8%* |
*30-day SEC yield is displayed for VPLS.
Vanguard Total Bond Market ETF (BND)
With a 0.03% expense ratio, BND is currently Vanguard’s cheapest bond fund. This ETF provides investors with broad exposure to U.S.-listed government Treasurys, mortgage-backed securities and investment-grade corporate bonds ranging from one to more than 25 years in maturity. Its benchmark, the Bloomberg U.S. Aggregate Bond Index, is used as a barometer of domestic fixed-income performance.
Metrics-wise, investors in BND currently get an average yield-to-maturity of 5%, which is the theoretical return expected if all of the ETF’s underlying bonds were held until maturity. Against this is an average duration of 6.7 years, meaning that for every 100-basis-point movement in interest rates, the price of BND will move 6.7% inversely. This means that rising rates hurt BND, while falling rates benefit it.
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. Pairing BNDX with BND therefore gives investors global fixed-income exposure.
This ETF tracks the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index, which holds more than 7,000 international bonds. BNDX is currency hedged, meaning that it employs derivatives to mitigate the effects of fluctuations between the U.S. dollar and foreign currencies. Right now, the ETF has a duration of 7.2 years, a yield to maturity of 5.3% and a 0.07% expense ratio.
Vanguard Long-Term Treasury ETF (VGLT)
“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.”
For this reason, a long-term Treasury ETF like VGLT could be a good way for investors to hedge against a potential recession. If a recession hits and the Federal Reserve cuts rates to stimulate the economy, VGLT could have strong upside potential due to a high 15.2-year duration and high credit quality. Currently, investors can expect a 4.7% yield to maturity and a 0.04% expense ratio.
[READ: 10 of the Best Stocks to Buy for 2024]
Vanguard Short-Term Corporate Bond ETF (VCSH)
On the other hand, investors who prioritize income generation and lower interest rate risk may find VGLT to be too volatile for their liking. The ideal Vanguard bond ETF to employ for this case could be VCSH, which sits on the other side of the spectrum compared to VGLT. This ETF holds investment-grade corporate bonds with maturities ranging from less than a year to five years.
Because its bonds have higher credit risk compared to Treasurys, VCSH’s yield to maturity is also higher at 5.5%. This is meant to compensate investors for the higher risk of default they take on. On the other hand, interest rate sensitivity for this ETF is low, with an average duration of just 2.6 years. As with VGLT, VCSH also charges a low 0.04% expense ratio.
Vanguard High-Yield Tax-Exempt Fund Investor Shares (VWAHX)
“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.” By keeping taxes low, investors can maximize their net yield received.
Consider VWAHX, which actively manages a portfolio of municipal bonds exempt from federal personal income taxes. While 80% of this fund must be held in investment-grade bonds, the fund manager can also allocate 20% to non-investment grade bonds, also known as high-yield bonds, to enhance returns. VWAHX charges a 0.17% expense ratio and requires a $3,000 minimum investment.
Vanguard Core-Plus Bond Fund Investor Shares (VCPIX)
Investors trying to outperform a bond index can use Vanguard’s actively managed bond funds like VCPIX to do so. “The strategy provides diversified exposure primarily to the U.S. investment-grade bond market, with the flexibility to opportunistically invest in high-yield corporate and emerging market bonds up to a 35% limit,” says John Croke, head of active fixed-income product management at Vanguard.
This strategy therefore provides bond investors with a hybrid, “best of both worlds” approach — a “core” that offers stability and benchmark-like returns, and a “plus” component that has the potential to generate higher returns. “We’ve designed our product and the process behind it to ensure that we are generating diversified sources of excess return and are not overly reliant on any one trade,” Croke says.
Vanguard Core-Plus Bond ETF (VPLS)
ETF investors can also access a variant of Vanguard’s core plus bond strategy via VPLS. Whereas VCPIX has a $3,000 investment minimum and a 0.3% expense ratio, VPLS is much more accessible and affordable, starting off at around $77 per share with a 0.2% expense ratio. Otherwise, the ETF has a similar strategy — augmenting a portfolio of investment-grade bonds with active management.
“As the ‘core’ naming convention implies, for most investors an allocation to the strategy represents the centerpiece of their overall fixed-income allocation,” Croke says. “Many investors allocate to these strategies as a singular turnkey fixed-income solution, allowing the professional money manager behind the fund to determine when it is best to alter interest rate, credit or sector-specific risks.”
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7 Best Vanguard Bond Funds to Buy originally appeared on usnews.com
Update 01/16/24: This story was previously published at an earlier date and has been updated with new information.
