Asset manager Vanguard is best known for its low-cost mutual funds and exchange-traded funds (ETFs), but the firm also has incredible breadth.
While dedicated fixed income managers like Pimco or Nuveen may have sophisticated actively managed funds, Vanguard competes by offering a breadth of options at low costs — currently, this means offering 114 bond mutual funds and ETFs with expense ratios starting at as low as 0.03%.
Investors can filter by region (U.S. or international), credit quality (high, medium or low), and maturity (short, medium or long). This ensures that no matter what your risk tolerance, time horizon or objectives are, there’s likely a Vanguard bond fund suitable for you.
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“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.”
For all these bond funds, transparency is key. Each fund’s webpage offers up-to-date portfolio metrics along with explanations for laypersons, making it easier to understand the fund’s composition and performance.
Some critical metrics to watch include the ETF’s credit rating distribution. ETFs holding investment-grade bonds (AAA to BBB) generally offer more security but lower yields, while high-yield bonds (BB and below) provide greater income but come with increased risk.
Also important is the yield to maturity, which measures the total return anticipated on a bond ETF if held until all of its underlying bonds mature. This metric considers the current market price, its coupon interest payments and the time remaining until maturity of the ETF’s underlying bonds.
Lastly, a bond ETF’s average duration is a measure of the fund’s overall price sensitivity to interest rate changes. A longer duration means the fund is more sensitive to interest rate movements. A bond ETF’s net asset value (NAV) moves inversely to rate changes.
Here are seven of the best Vanguard bond mutual funds and ETFs to buy:
| Fund | Expense ratio |
| Vanguard Total Bond Market Index Fund Admiral Shares (ticker: VBTLX) | 0.05% |
| Vanguard Total International Bond Index Fund Admiral Shares (VTABX) | 0.11% |
| Vanguard Total World Bond ETF (BNDW) | 0.05% |
| Vanguard Short-Term Treasury ETF (VGSH) | 0.04% |
| Vanguard Total Corporate Bond ETF (VTC) | 0.04% |
| Vanguard Tax-Exempt Bond ETF (VTEB) | 0.05% |
| Vanguard Core-Plus Bond Fund Investor Shares (VCPIX) | 0.30% |
Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)
“As with most things Vanguard, they are widely known as the low-cost fund provider when compared to their peers,” Moss says. “When you keep your investment fees lower, you can improve total returns.” A great example is VBTLX, which charges a 0.05% expense ratio. You can also buy the Vanguard Total Bond Market ETF (BND) for a 0.03% expense ratio to sidestep the $3,000 minimum investment requirement.
Both VBTLX and BND track the Bloomberg U.S. Aggregate Float Adjusted Index. This benchmark holds over 11,000 government-issued Treasury bonds, mortgage-backed securities and investment-grade corporate bonds ranging from less than one year to over 25 years in maturity. Overall, investors can expect a 5% yield to maturity and an intermediate duration of six years.
Vanguard Total International Bond Index Fund Admiral Shares (VTABX)
The international counterpart to VBTLX is VTABX. “VTABX 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.
VTABX holds 6,836 sovereign bonds and investment-grade corporate bonds represented by the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index. This fund is currency-hedged to mitigate additional volatility from foreign exchange rate fluctuations. Currently, it is paying a 5.2% yield to maturity with a duration of 7.2 years. VTABX charges a 0.11% expense ratio.
Vanguard Total World Bond ETF (BNDW)
Investors seeking maximum fixed-income diversification can use BNDW in lieu of holding both VBLTX and VTABX. This approach is simpler and cheaper with a 0.05% expense ratio. BNDW’s “fund of funds” structure simply wraps the ETF equivalents of VBTLX and VTABX to provide global bond exposure. Its expense ratio reflects the weighted average of its underlying ETFs and does not include hidden fees.
By holding a Vanguard U.S. and international bond ETF, BNDW is able to replicate the characteristics of the highly diversified Bloomberg Global Aggregate Float Adjusted Composite Index. This means you get exposure to over 18,000 high-credit-quality global government and corporate bonds of various maturities, earning a yield to maturity of 5.1% with an average duration of 6.6 years.
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,” 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.”
VGSH is able to minimize both default and interest rate risk by only holding U.S. Treasury bonds with maturities of one to three years. With an average duration of just 1.9 years, a 100-basis-point hike in interest rates would only cause this ETF to lose around 1.9% in NAV, all else being equal. Currently, investors can earn a 4.8% yield to maturity for a 0.04% expense ratio.
Vanguard Total Corporate Bond ETF (VTC)
Treasury bonds may be considered among the lowest risk in terms of default probability, but that safety comes with lower yields. Investors open to taking on greater credit risk can opt for investment-grade corporate bonds, which start at the BBB rating level. These are issued by companies looking to raise capital, and when you purchase one, you essentially become a lender to these companies.
To access a diversified pool of investment-grade corporate bonds, investors can buy VTC. This ETF is also a “fund of funds,” wrapping three other Vanguard ETFs covering short-term, intermediate and long-term corporate bonds. Overall, VTC currently pays a 5.5% yield to maturity while taking on a 6.9-year duration. It charges a low 0.04% expense ratio that includes all underlying fund fees.
Vanguard Tax-Exempt Bond ETF (VTEB)
“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.” The Vanguard bond fund for this role is VTEB.
VTEB tracks the Standard & Poor’s National AMT-Free Municipal Bond Index, which holds municipal bonds. The interest payments from these securities are exempt from both federal taxes and the alternative minimum tax (AMT), a separate taxation scheme for high-income investors. VTEB currently pays a 3.7% yield to maturity with a 6.4-year duration and charges a 0.05% expense ratio.
Vanguard Core-Plus Bond Fund Investor Shares (VCPIX)
Not all of Vanguard’s bond funds are passively managed, index-tracking products. The firm also has a number of actively managed bond funds that charge competitive fees. These bond funds attempt to outperform an index benchmark by relying on the expertise of a dedicated portfolio management team and fixed income specialists. A recently launched example is VCPIX, which charges a 0.3% expense ratio.
“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. Currently, investors get a 5.4% yield to maturity against a 5.6-year average duration.
[READ: 7 of the Best Fidelity Bond Funds to Buy for Steady Income]
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7 Best Vanguard Bond Funds to Buy originally appeared on usnews.com
Update 07/16/24: This story was previously published at an earlier date and has been updated with new information.
