7 Top-Rated Vanguard Bond Funds for Every Type of Investor

Does the volatility of your investing portfolio keep you up at night? If so, you might want to put some of your money into bonds.

Aside from the bad year of 2022, when interest rates went up sharply, bonds have always been an important part of managing a portfolio.

Bonds can act as a buffer for investors because they don’t move in the same way as stocks and have steady cash flows. This helps reduce volatility and keep drawdowns to a minimum. Bonds help buyers smooth out their portfolio’s long-term ups and downs and aim for a more steady stream of returns.

Moss says, “Vanguard’s lineup of bond funds includes government bonds, corporate bonds, municipal bonds, and international bonds.” “Because there are so many choices, investors can make a well-diversified bond portfolio that fits their investment goals and level of risk tolerance.”

Here are seven of the best bond mutual funds and ETFs from Vanguard to buy in 2023:

  1. Vanguard Total Bond Market ETF (ticker: BND)
  2. Vanguard Total International Bond ETF (BNDX)
  3. Vanguard High-Yield Corporate Fund Investor Shares (VWEHX)
  4. Vanguard Total Corporate Bond ETF (VTC)
  5. Vanguard Long-Term Treasury Index Fund Admiral Shares (VLGSX)
  6. Vanguard Tax-Exempt Bond ETF (VTEB)
  7. Vanguard Ultra-Short Bond ETF (VUSB)

Vanguard Total Bond Market ETF (BND)

If an investor doesn’t care about a certain type, maturity, or credit quality of the bond, they can just buy in all of them through BND. This ETF follows the Bloomberg U.S. Aggregate Float Adjusted Index, which invests in a wide range of bonds, from U.S. Treasurys to investment-grade corporate bonds with different terms. It has over 10,000 different bonds in its collection, and the cost per bond is only 0.03%.

At the moment, BND has an average yield to maturity, or YTM, of 4.8%. This is the theoretical return an investor can expect if all of its underlying bonds are kept until maturity.

The average term, which is a measure of how sensitive the loan is to changes in interest rates, is 6.5 years. If rates go up by 100 basis points, BND will lose 6.5% of its value, all other things being equal. If rates are cut, however, the opposite will happen.

Vanguard Total International Bond ETF (BNDX)

“BNDX offers diversification benefits because it includes investment-grade bonds issued by governments and companies outside the U.S.,” says Michael Ashley Schulman, partner and chief investment officer at Running Point Capital Advisors.

7 Top-Rated Vanguard Bond Funds for Every Type of Investor

“This gives investors access to international bonds that are priced in different currencies.” This ETF is a lot like BND but for the foreign market.

By spreading their bond investments around the world, investors can take advantage of different interest rate systems in other countries and protect themselves against the small but possibly disastrous risk of the U.S. bond market collapsing. Also, BNDX is currency-hedged to protect against changes in foreign exchange rates. The ETF has an average term of 7.5 years and costs 0.07% in fees. The YTM is 5.3%.

Vanguard High-Yield Corporate Fund Investor Shares (VWEHX)

BND is made up of investment-grade corporate bonds that are rated BBB or better by two or more of the major credit rating agencies. Even though they are less likely to go bad, they don’t have the best yields. Investors who want to make the most money possible might want to look into a high-yield bond fund like VWEHX, which holds non-investment grade bonds and pays a YTM of 7.1% at the moment.

“This fund tries to get a higher income by investing in lower-rated, high-yield corporate bonds,” says Schulman. “This is because these bonds have a higher credit risk.”

About 48.3% of VWEHX’s bonds have a BB rating, while 34.3% have a B rating. The cost of the fund is 0.23 percent.

Vanguard Total Corporate Bond ETF (VTC)

Investment-grade corporate bonds are the middle ground between Treasurys and high-yield bonds for investors who want to find a better mix between high credit quality and high yields. VTC is an ETF that tracks the Bloomberg U.S.

Corporate Bond Index and gives investors access to a large part of the U.S. investment-grade market. It currently holds over 7,200 individual bonds.

7 Top-Rated Vanguard Bond Funds for Every Type of Investor

VTC uses a balanced “ETF of ETFs” scheme by putting 39% in the Vanguard Short-Term Corporate Bond ETF (VCSH), 27.4% in the Vanguard Intermediate-Term Corporate Bond ETF (VCIT), and 33.6% in the Vanguard Long-Term Corporate Bond ETF (VCLT). The end result is a YTM of 5.5% and an average length of 7.2 years. The cost ratio for VTC is 0.04%.

Vanguard Long-Term Treasury Index Fund Admiral Shares (VLGSX)

Chris Tidmore, senior manager at Vanguard’s Investment Advisory Research Center, says that investors should know the two main types of risk that come with fixed-income investments before choosing a bond fund. “Bond funds with long-term maturities are more sensitive to changes in interest rates. A fund’s riskiness is also affected by the credit quality of the bonds it holds.”

Investors can tailor their exposure to each of these measures by choosing the right bond fund. Now that the Federal Reserve has raised interest rates to their highest level in 22 years, buyers who want to bet on interest rates going down should think about the VLGSX bond fund. This fund invests in Treasury bonds that have an average maturity of 16 years. This means that the fund is likely to gain from future rate cuts. It has a cost factor of 0.07%.

Vanguard Tax-Exempt Bond ETF (VTEB)

“Another thing to think about when thinking about bond funds for your portfolio is whether you’re investing outside of an IRA or other tax-advantaged retirement account,” says Tidmore. “A tax-exempt bond fund could help you pay less tax if you’re in a high tax bracket and investing outside of your retirement account.” Vanguard’s VTEB costs 0.05% per year to do this.

VTEB follows the Standard & Poor’s National AMT-Free local Bond Index, which is mostly made up of local bonds that are exempt from both federal income taxes and the federal alternative minimum tax. This ETF is made up of municipal bonds that have a high credit rating, with most of them having an AA ranking. At the moment, VTEB pays a YTM of 3.5% for an average term of 5.8 years.

Vanguard Ultra-Short Bond ETF (VUSB)

All of Vanguard’s earlier bond funds were passively managed, which means that they only changed based on what an underlying index did. Moss says, “Vanguard also has a number of actively managed bond funds that try to beat their benchmark and are known for having low fees compared to their competitors.”

One example is VUSB, which has a portfolio of short-term investment-grade corporate bonds that it actively handles. VUSB is an ETF that is actively managed, so it doesn’t just copy an index. Instead, its managers choose bonds based on their own strategy, with the goal of making the portfolio less volatile and aiming for better yields. VUSB has a current YTM of 5.8%, an average duration of 0.9 years, and a cost ratio of 0.10%.

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