This is an excellent investment-grade bond fund.

fundcoverage@morningstar.comBND
by Alex Bryan
7/15/2019
Vanguard Total Bond Market ETF

Vanguard Total Bond Market ETF BND is a solid, low-cost core investment-grade bond fund. It takes less credit risk than most of its actively managed counterparts and enjoys a sizable cost-advantage, supporting a Morningstar Analyst Rating of Silver.

The fund tracks the market-value-weighted Bloomberg Barclays U.S. Aggregate Float-Adjusted Index, which includes U.S.-dollar-denominated bonds with at least one year until maturity. Market-value weighting allows the fund to harness the market’s collective wisdom about the relative value of each holding. It also keeps transaction costs low by mitigating turnover and tilting the portfolio toward the largest debt issues, which tend to be the cheapest to trade. The float adjustment excludes the value of bonds held by the Federal reserve from the weighting calculations, which should slightly reduce the portfolio’s exposure to mortgage-backed securities. However, this adjustment usually doesn’t have a big impact.   

The portfolio favors high-quality government Treasuries and agency mortgage-backed securities, which jointly account for around two thirds of the portfolio. This should help the fund hold up better than most of its peers when credit spreads widen, which typically occurs in tough economic environments. However, it may not keep pace with funds that overweight lower-quality issuers when credit risk pays off. Like most intermediate-term investment-grade funds, most of this portfolio’s risk comes from its sensitivity to interest rates. 

While this index fund’s bias toward high-quality debt could make it a low hurdle for active managers, that does not diminish the case for owning this index portfolio. Bonds’ risk and return are closely linked. Funds that regularly earn higher returns are likely taking greater risk. After adjusting for risk, this fund becomes a tougher hurdle to beat. This is one of the cheapest intermediate-term bond funds available, which should give it a durable edge.

Over the trailing 10 years through June 2019, the fund slightly lagged the intermediate core bond Morningstar Category average by 52 basis points annually, largely owing to its greater exposure to Treasuries. 



Portfolio Construction

This broad, market-value-weighted portfolio reflects the composition of the U.S.-dollar-denominated investment-grade bond market, harnessing the market’s collective wisdom. It tilts toward high-credit-quality issuers, providing good downside protection, mitigates transaction costs, and avoids key-person risk, supporting a Positive Process Pillar rating. The fund employs representative sampling to track the Bloomberg Barclays U.S. Aggregate Float Adjusted Index. This index includes investment-grade corporate, government, securitized debt denominated in U.S. dollars with at least one year to maturity and a face value of at least $300 million. The index weights its holdings by market value and is rebalanced monthly. However, it excludes the value of treasury, agency, and mortgage-backed securities held by the Federal Reserve from its weighting calculations. The standard version of the aggregate bond index also excludes Treasuries the Fed holds, so this adjustment principally decreases the fund's exposure to MBS, though the impact is usually small. If the unwinds its positions in these holdings, it could increase the fund’s exposure to them. The fund does not hold every security in the benchmark but instead carefully replicates the index's key characteristics. This sampling approach helps reduce transaction costs. Effective management has kept tracking error low.

Fees

Vanguard charges a low 0.035% expense ratio for this offering, which is a among the lowest in the category, supporting a Positive Price Pillar rating. Over the trailing three years through June 2019, the fund lagged its benchmark by 9 basis points annually.

S&P 500 index data: S&P 500 Copyright @ 2019

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