A bond ETF, similar to stock ETFs, is a pooled investment fund primarily investing in bonds. They invest based on bond market indexes like Bloomberg Barclays Global Aggregate Bond Index, Citi World Broad Investment-Grade Bond Index, and Citi World Government Bond Index. Like a mutual fund, bond exchange-traded funds(ETFs) are tradable on major stock exchanges in the US.
Bond ETFs are liquid and transparent investment securities as they are public-listed. Due to disclosure requirements, unlike real estate, bond ETFs reflect their values quickly and timely according to changes in the economy and the company’s credit situations.
Bond ETFs invest mainly in Government Treasuries and corporate fixed-income securities. Investors can gain access to different types of bonds with different yields and maturities. More than that, as bond ETFs are passively-invested funds, the cost is lower than other bond mutual funds.
Understanding Bond ETFs
Bond ETFs offer many benefits individual bonds don’t. Let’s take a look at them in detail:
Most bonds pay interest or coupons regularly, mostly on a six-month schedule. However, bond ETFs, due to structure design, can pay coupons monthly. An example is: Vanguard Total Bond Market ETF(BND) has 10,025 bonds in its portfolio. The fund has a wide range of respective coupon payment dates. Therefore it can pay interest more frequently to bond investors than general bonds.
Liquidity is one of the problems a bond investor faces in their investment portfolios. As a denomination of $1,000 for a bond is a minimum requirement for investing in bonds, bondholders may find it difficult to sell out in a short time. Besides, the pricing information is not always accurate due to low market liquidity.
Like stocks, bond ETFs trade all day, and updated price quotes are always available in exchanges. Investors can track the updated pricing information whether they intend to sell or buy.
Pros and Cons
You may want to hold bonds in your investment portfolio; however, you should know some benefits and drawbacks of investing in Bond ETFs before making any decisions.
Investors in a bond ETF hold a stake in a fund owning thousands of bonds in markets. For example, suppose you buy a unit of the Vanguard Total International Bond ETF(BNDX). In that case, you have already held a part of 6,323 bonds across North America, Europe, Japan held in the portfolio. Diversification reduces the risk enormously because you hold many bonds simultaneously.
2. Buy bond ETFs online(Pros)
It is never much more convenient than ever to buy bonds ETFs online. Open an account on brokerages’ official websites like TD Ameritrade, Fidelity, Interactive Brokers, and trade to easily buy or sell funds. But beware that there is a commission charged to you through some of the brokers. You should check before doing it.
No maturity dates are available for bonds within ETFs. As an ETF fund holds bonds with multiple maturities, it is not practical to redeem the bonds simultaneously for principals in a short time. They can, however, sell units of the bond ETF they invested in earlier.
4. Interest Rate Risk(Cons)
As mentioned earlier, bond ETF investors do not own the bonds themselves. They buy units of a bond ETF. When the interest rate rises, the bond prices fall. Investors cannot do anything to stop the fall of the bond value except for selling their stakes.
Bond ETFs vs. Bond Mutual Funds
You should beware of the advantages and disadvantages of both types of funds.
- Investment objectives: If you want to increase bond fund investing returns, bond mutual funds may be the right choice. They belong to active-managed funds seeking higher returns. But you should note the risks are higher than bond ETFs.
Though being passive-managed funds, bond ETFs are suitable for do-it-yourselves investors. ETF investors can make frequent trading within business hours as ETFs can be traded in full business hours while bond mutual funds have one price quote only in a day.
- Bond buy-back: As there are no maturities for bond ETFs, bond ETFs may find it hard to redeem the bonds and get back full principals for investors. However, bond mutual funds may repurchase them from investors.
Bond ETFs vs. Bond Ladder
Bond Ladder is buying bonds with different maturities and reinvesting with the proceeds upon maturities. The purpose is to 1. increase income, 2. reduce interest rate risk, credit risk, and liquidity risk.
- Regarding income, bond ETFs have the flexibility of paying monthly and do not require the effort of re-designing bond laddering strategies over and over again.
- In terms of interest rate risk, a bond ladder may have more reinvesting protection than a bond ETF.
However, a bond ladder may face credit risk when investors choose smaller companies with smaller bonds using a bond ladder. Bond ETFs buy bonds from larger companies and Governments within the indexes and reduce the credit risks.
Furthermore, a bond ladder should match the bond maturities in the portfolio so they can provide liquidity. The price quotes of bond ETFs are on-screen on the exchanges and tradable all day. They both have the risk of getting full principals back upon maturity.
Things to Consider Before Getting a Bond ETF
Before investing in a bond ETF, you should consider several things:
Think long term
You should know a bond ETF is a mid-to-long-term investment with stable income streams. Income takes priority over capital appreciation. If you think otherwise, you may suffer from the loss.
What is the best Vanguard bond ETF?
Vanguard is one of the prestigious bond investing companies. The Vanguard Total Bond Market ETF(BND) invests in the US Federal Government bonds (more than 60%) and investment-grade corporate bonds (the remaining). It almost eliminates the credit risk!
Furthermore, it holds more than 10,000 bonds and diversifies significant risks.
What are the best bond ETFs?
Apart from two Vanguard bond ETFs, some best-run funds are low-cost and offer stable income. They are suitable for being a part of your portfolio:
- iShare Core US Aggregate Bond ETF(AGG)
- iShares Core Total USD Bond Market ETF(IUSB)
- iShares U.S. Treasury Bond ETF(GOVT)
- SPDR Bloomberg Barclays 1-3 Month T-Bill ETF(BIL)
- PIMCO Enhanced Short Maturity Active ETF(MINT)
- DoubleLine Total Return Bond Fund Class N(DLTNX)
- BlackRock Strategic Income Opportunities Investor A(BASIX)
- Vanguard Core Bond Fund Investor(VCORX)
- Vanguard Long-Term Bond ETF(BLV)
- Vanguard Intermediate-Term Bond ETF(BIV)
- Vanguard Short-Term Corporate Bond Index Fund ETF(VCSH)
- Vanguard Total Bond Market ETF(BND)
These are some of the best bond ETFs available for investors to consider. You should consult a financial professional before making any decision.
Does Vanguard have a high yield bond ETF?
No, Vanguard does not offer high yield bond ETFs but has a high yield bond mutual fund. The company thinks such a type of bond ETFs is not fit for conservative investors.
Are bond ETFs a good investment?
Beforehand, you should consider your investment strategy: If you intend to invest in bond funds, you should look at two options: bond ETFs and bond mutual funds. You may like bond ETFs if you are a frequent trader, as bond ETFs are tradable all-time on the exchanges. You should invest in bond mutual funds if you are worried about finding buyers for ETFs as the mutual fund can repurchase your stakes back.
List of all Vanguard Bond ETFs
Here is a list of main Vanguard bond ETFs currently offered:
|Name||Ticker||Asset Class||Expense Ratio||Investment Objectives|
|Extended Duration Treasury ETF||EDV||Bond – Long-term Treasury||0.07%||Broad exposure to long-term Treasury STRIPS market; Provide steady income with high credit quality.|
|Intermediate-Term Bond ETF||BIV||Bond – Inter-term Treasury||0.05%||Exposure to 5-10 year bonds with US Government and Corporate bonds of investment-grade, also to international dollar-denominated bonds.|
|Intermediate-Term Treasury ETF||VGIT||Bond – Inter-term Government||0.05%||Invest primarily in the US Treasury bonds.|
|Long-Term Bond ETF||BLV||Bond – Long-term Investment||0.05%||Diversified exposure to the long-term, investment-grade U.S. bond market.|
|Long-Term Treasury ETF||VGLT||Bond – Long-term Government||0.05%||Invests primarily in U.S. Treasury bonds and Maintains a dollar-weighted average maturity of 10 to 25 years.|
|Mortgage-backed Securities ETF||VMBS||Bond – Inter-term Government||0.05%||Invest primarily in U.S. agency mortgage-backed pass-through securities issued by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).|
|Vanguard Short-Term ETF||BSV||Bond – Short-term Investment||0.05%||Invests in U.S. government, high-quality (investment-grade) corporate, and investment-grade international dollar-denominated bonds.
|Short-Term Inflation-Protected Securities ETF||VTIP||Bond – Short-term Government||0.05%||Invests in bonds backed by the full faith and credit of the federal government and whose principal is adjusted semi-annually based on inflation.
Designed to generate returns more closely correlated with realized inflation over the near term
|Short-Term Treasury ETF||VGSH||Bond – Short-term Government||0.05%||Invest primarily in high-quality (investment-grade) U.S. Treasury bonds.|
|Total Bond Market ETF||BND||Bond – Inter-term Investment||0.035%||Provide broad exposure to the taxable investment-grade U.S. dollar-denominated bond market, excluding inflation-protected and tax-exempt bonds.|
|ESG US Corporate Bond ETF||VCEB||Bond – Inter-term Investment||0.12%||Screened for certain environmental, social, and corporate governance (ESG) criteria.|
|Intermediate-Term Corporate Bond ETF||VCIT||Bond – Inter-term Investment||0.05%||Invests primarily in high-quality (investment-grade) corporate bonds|
|Long-Tem Corporate Bond ETF||VCLT||Bond – Long-term Investment||0.05%||Invests primarily in high-quality (investment-grade) corporate bonds|
|Short-Term Corporate Bond ETF||VCSH||Bond – Short-term Investment||0.05%||Invests primarily in high-quality (investment-grade) corporate bonds|
|Total Corporate Bond||VTC||Bond – Inter-term Investment||0.05%||Unique ETF of ETF structure|
|Tax-Exempt Bond ETF||VTEB||Bond – Inter-term National Muni||0.06%||provide federal tax-exempt income and can tolerate moderate price and income fluctuations may wish to consider this fund|
|Total World Bond||BNDW||International||0.06%||Broad, diversified exposure to the global investment-grade bond market|
|Total International Bond ETF||BNDX||International||0.08%||1. Employs hedging strategies to protect against uncertainty in exchange rates
2. Provides a convenient way to get broad exposure to non-US dollar-denominated investment-grade bonds
|Vanguard Emerging Market Government Bond (higher risk)||VWOB||International||
|Provides a convenient way to get additional exposure to emerging market government bonds|
The top 18 Vanguard bond ETF fund series offers a wide choice for investors to choose. As you can see, they are low-cost and passively managed funds. They are suitable for conservative investors who want to preserve capital and need steady income regularly or monthly.
For aggressive investors, they can be a hedge against downfalls of other investments due to market crashes or recession.
Like other ETFs, Vanguard bond ETFs have highly transparent and easy-to-follow portfolios based on mimicking major bond index benchmarks. Therefore, the expense ratio is lower than other bond mutual funds.
The last bond fund in the table above, “Vanguard Emerging Market Government Bond,” is additionally added. Investors willing to take higher risks and returns may like to invest in the fund. It offers exposure to emerging government bonds in return for higher rewards.
Investors intending to buy bonds should consider their objectives. Bond investing is a mid-to-long-term investment. If you choose to favor stable income over capital appreciation, bond investing is an appropriate investment tool and, besides, a hedging tool in your portfolio.
While choosing between a bond ETF and a bond mutual fund, you should clarify whether you will actively and frequently trade. Choose a bond ETF if the answer is yes. Otherwise, take a bond mutual fund if it is No!
And suppose you can afford the effort to restructure a bond portfolio and save management fees by fund managers, and even design your income streams. In that case, the do-it-yourself of a bond ladder is for you, but it lacks diversifications like bond ETFs.
One more thing: You may find individual bonds or ETFs hard to find a buyer; a bond mutual fund may be the best choice because it will buy back the units from you.
No matter what choice you make, information collecting and analysis should be a go-ahead before you act. Investing is the final step of your decision. Investoralist contains a lot of in-depth expert analysis and useful information. You can also find more investment tips and questions and answers to your needs here.
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