If you’re looking to simplify your bond investments with minimal fees, Vanguard’s offerings could be precisely what you need.
While firms like Pimco have long dominated the bond market with their sophisticated actively managed funds and deep research capabilities, it was Vanguard that truly democratized bond investing for the retail investor.
This shift began in 1986 with the launch of the Vanguard Total Bond Market Index Fund (ticker: VBMFX). Before the advent of bond index funds like VBMFX, individual bond investing was largely inaccessible to the average retail investor due to the complexities involved.
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Bonds are traded over-the-counter (OTC), and pricing information was not as readily available or transparent then as it is today. Investors had to rely on bond dealers for price quotes, and these could vary significantly from one dealer to another. Additionally, the minimum investment amounts were typically high, often out of reach for smaller investors.
This opaque and somewhat exclusive market structure meant bond investing was done mostly by institutional investors or affluent individuals with advisors.
However, the launch of VBMFX introduced a mutual fund structure that leveraged a transparent index. This approach aggregated numerous bonds into a single, diversified portfolio that was accessible at a lower cost and with lower minimum investments.
This expanded access to bond markets. Thanks to VBMFX, retail investors could buy a diversified portfolio of investment-grade bonds at a low cost, something that was previously complex and managed by financial advisors.
Today, Vanguard continues to lead with a wide array of 114 bond mutual funds and exchange-traded funds (ETFs) that cater to various investor needs regarding credit quality, geographic exposure, maturity and tax considerations.
“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.”
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 (VBTLX) | 0.05% |
| Vanguard Total International Bond Index Fund Admiral Shares (VTABX) | 0.11% |
| Vanguard Long-Term Treasury ETF (VGLT) | 0.04% |
| Vanguard Ultra-Short Bond ETF (VUSB) | 0.10% |
| Vanguard Tax-Exempt Bond Index Fund Admiral Shares (VTEAX) | 0.09% |
| Vanguard Core-Plus Bond Fund Investor Shares (VCPIX) | 0.30% |
| Vanguard Total World Bond ETF (BNDW) | 0.05% |
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.” For instance, investors today can get an updated version of the same strategy used by VBMFX via VBTLX, which tracks the Bloomberg U.S. Aggregate Float Adjusted Index for a 0.05% expense ratio.
VBTLX’s portfolio is highly diversified, spanning over 11,100 government Treasurys, mortgage-backed securities (MBS) and investment-grade corporate bonds. On average, the fund has a yield to maturity of 4.2% and a duration of six years, which measure total return potential and interest rate sensitivity, respectively. However, prospective investors will need a minimum of $3,000 to access this fund.
Vanguard Total International Bond Index Fund Admiral Shares (VTABX)
Vanguard’s bond fund lineup also includes foreign options like 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.
The benchmark tracked by VTABX is the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index, which holds over 6,800 bonds from both international developed and emerging market countries. Currently, investors can expect a 4.7% yield to maturity and a 7.2-year duration. The fund is also currency hedged to mitigate volatility from fluctuations in foreign exchange rates. VTABX charges 0.11%.
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.”
These two traits can be mixed and matched to produce the desired risk-and-return profile a bond investor is looking for. For instance, if you’re looking for protection against a recession, a long-term Treasury like VGLT could be ideal. With an average duration of 15 years and high credit quality, this ETF is poised to benefit if the Federal Reserve cuts rates due to a possible economic downturn.
Vanguard Ultra-Short Bond ETF (VUSB)
On the other end of the spectrum from VGLT is VUSB. This ETF focuses on shorter-maturity fixed-income instruments, which insulates it from interest rate risk with an average duration of just 0.9 year. However, it still manages to deliver a decent 4.7% yield to maturity thanks to high current short-term interest rates, but also in part due to the lower credit quality of its underlying bonds.
Unlike VGLT, VUSB does not exclusively hold Treasurys. Instead, the ETF also holds investment-grade asset-backed bonds and investment-grade corporate bonds. Compared to Treasurys, these bonds have higher credit risk but make up for it with greater income potential. Thus, VUSB’s ideal role in a portfolio is as a slightly higher-risk substitute for a money market fund. The ETF charges a 0.1% 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.” The Vanguard bond mutual fund to buy for this role is VTEAX.
VTEAX tracks the Standard & Poor’s National AMT-Free Municipal Bond Index. Unlike the previous funds, the 10,200-plus bonds represented by this benchmark are exempt from federal taxes and the alternative minimum tax (AMT). This means the 3.3% yield to maturity VTEAX currently pays is actually misleading — on a tax-equivalent basis, it could be much higher depending on your income bracket.
Vanguard Core-Plus Bond Fund Investor Shares (VCPIX)
Vanguard’s most notable bond fund milestone may have come in 1986 with the launch of VBMFX, but it wasn’t actually the firm’s first foray into bonds. In 1977, Vanguard launched a series of actively managed municipal bond funds, targeting short-, intermediate- and long-term maturities. Today, the firm is still launching actively managed bond strategies with examples like VCPIX.
“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. VCPIX is cheaper than most actively managed bond funds as well, with a reasonable 0.3% expense ratio.
Vanguard Total World Bond ETF (BNDW)
In terms of sheer diversification, few bond funds can rival BNDW. This ETF tracks the Bloomberg Global Aggregate Float Adjusted Composite Index and currently holds over 18,000 bonds. However, BNDW achieves this in an efficient manner via a “fund of funds” structure. Currently, it holds the Vanguard Total Bond Market ETF (BND) and the Vanguard Total International Bond ETF (BNDX) in equal weights.
Buying BNDW gives investors access to the world’s investment-grade fixed income market, with exposure to government bonds, MBS and corporate bonds averaging out to a 4.5% yield to maturity and 6.6-year duration. Unlike a bond mutual fund, BNDW has no minimum investment requirement. As an ETF, it can be purchased for about $69 per share. BNDW charges 0.05%.
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7 Best Vanguard Bond Funds to Buy originally appeared on usnews.com
Update 10/31/24: This story was previously published at an earlier date and has been updated with new information.
