A bond fund is an exchange-traded fund (ETF) or a mutual fund that invests only in debt instruments. It is a portfolio of different bonds put together by an investment firm and traded as a single unit. The value of each unit share is known as the net asset value (NAV), and investors can freely buy and sell the shares. Bond funds pay monthly interest but the amount varies from month to month.
Investing in a bond fund means buying a basket of different bonds in one investment. It is an easy way to have a diversified bond portfolio with small capital. In this guide, we introduce you to Vanguard bond funds and offer our top 10 best Vanguard bond funds to buy.
Where Can I Trade Vanguard Bond Funds?
You can trade Vanguard bond funds directly with the firm by opening a Vanguard trading account. But you can also trade the bond funds via a multi-asset online broker. If you trade with Vanguard, you will pay management fees but no trading commissions. Trading via a broker means that you will pay both the management fees and trading commissions.
What Is A Vanguard Bond Fund?
A Vanguard bond fund is a fund created by the Vanguard Group that invests only in bonds or other debt securities. The Vanguard Group is one of the world's largest investment management companies, with over 400 low-cost traditional funds and ETFs. The firm has created many bond funds — both mutual funds and ETFs — that invest in various types of bonds, including corporate and government bonds.
There are different forms of Vanguard bond funds. Some concentrate on high-yield corporate bonds, some focus on low-yield but safer government bonds, and some invest in a mixture of both types of bond. However, the more common way to classify the bond funds is based on the maturity period of the constituent bonds: long-term (10 years or more), short-term (less than 3 years), and intermediate-term (3 to 10 years).
So, there are different variants of Vanguard bond funds, such as a short-term treasury fund or a long-term corporate high-yield fund. The Vanguard Group also has bond funds that track the broad bond market, and these are called index bond funds.
Invest in Vanguard Bond Funds in 3 Steps
Determine the Vanguard Bond Funds You Want to Buy
Vanguard offers a wide variety of bond funds, so the first thing is to choose the one you want to buy. Factors to consider include the constituent bonds and the yield, as well as the average maturity of the constituent bonds and the creditworthiness of the entities that issued them.
Open a Trading Account
You can buy Vanguard bond funds directly from the firm or via an online broker. Take note of commissions and management fees. If you are buying directly from the firm, there will be no trading commissions, but if you are buying from a broker, your costs include both commissions and management fees.
After signing up and funding your account, you can select the Vanguard bond funds you want from the firm’s or broker’s platform and place your buy orders. You can sell your units in the funds when you want to reclaim your capital, and meanwhile, you will receive monthly interest.
Best Vanguard Bond Funds to Buy Now
These are the best Vanguard bond funds to buy in 2021 based on certain parameters, such as yield, average maturity, asset diversification, and expense ratio:
- Vanguard Total Bond Market Index Fund ETF Shares (BND)
- Vanguard Long-Term Treasury ETF (VGLT)
- Vanguard Tax-Exempt Bond ETF (VTEB)
- Vanguard Short-Term Corporate Bond ETF (VCSH)
- Vanguard Long-Term Corporate Bond Index (VCLT)
- Vanguard Intermediate-Term Corporate Bond (VCIT)
- Vanguard Long-Term Bond Index Fund ETF Shares (BLV)
- Vanguard Short-Term Inflation-Protected Securities Index Fund ETF Shares (VTIP)
- Vanguard Total International Bond Index Fund ETF Shares (BNDX)
- Vanguard Emerging Markets Government Bond Index Fund ETF Shares (VWOB)
1. Vanguard Total Bond Market Index Fund ETF Shares (BND)
BND tracks the performance of the Bloomberg Barclays U.S. Aggregate Float Adjusted Index, which measures the performance of a wide spectrum of government, corporate, and international dollar-denominated bonds with maturities of more than one year. The investments are selected through a sampling process, but at least 80% of the fund’s assets are invested in bonds held in the index. BND rose by 1.03% in 2020.
2. Vanguard Long-Term Treasury ETF (VGLT)
VGLT tracks the performance of the Bloomberg Barclays U.S. Long Treasury Bond Index. The fund invests in U.S. Treasury bonds with a long-term, dollar-weighted average maturity of 10 to 25 years. As of February 2021, VGLT has a 12-month yield of 2.32% and a sizable $6.04bn in assets under management (AUM). The fund slipped by 1.93% in 2020.
3. Vanguard Tax-Exempt Bond ETF (VTEB)
VTEB tracks the S&P National AMT-Free Municipal Bond Index, which measures the performance of the investment-grade segment of the U.S. municipal bond market. The fund invests in municipal bonds issued by state or local governments whose interest is exempt from U.S. federal income taxes and the federal alternative minimum tax (AMT). At the time of writing, the fund has $11.89bn in AUM, and the yield is 1.96%. The bond appreciated by 0.94% in 2020.
4. Vanguard Short-Term Corporate Bond ETF (VCSH)
VCSH tracks the performance of the Bloomberg Barclays U.S. 1-5 Year Corporate Bond Index. The fund invests in dollar-denominated, fixed-rate, taxable securities issued by industrial, utility, and financial companies, with maturities between 1 and 5 years. As of February 2020, the fund’s yield is 2.2%, and it has $44.06bn AUM. In 2020, VCSH appreciated by 1.74%.
5. Vanguard Long-Term Corporate Bond Index (VCLT)
VCLT tracks the Bloomberg Barclays U.S. 10+ Year Corporate Index. The fund invests in U.S. long-term dollar-weighted, investment-grade corporate bonds issued by financial, industrial, and utility companies with at least ten years maturity period. VCLT has $6.1bn in AUM at the time of writing, and its yield is 3.25%. The fund slid by 5.75% in the last three months to February 2021.
Expert Tip on Investing in Vanguard Bond Funds“ Keep an eye on interest rates because bonds have an inverse relationship with interest rates: when interest rates rise, bond prices depreciate and vice versa. Since you buy Vanguard bond funds with the hope of selling them at a higher net asset value (NAV), try to buy when interest rates are expected to decline so that you can sell at a higher NAV. ”
Why Trade Vanguard Bond Funds?
There are many reasons why investors trade Vanguard bond funds. Firstly, they help to preserve capital because there’s a lower risk of losses compared to stocks and other assets. Secondly, they offer monthly interest which guarantees some form of cash flow. Thirdly, Vanguard bond funds offer a way to diversify investment portfolios.
Frequently Asked Questions
Vanguard bond funds are a good investment because they’re passive investments with low risk. However, you could get higher returns in other asset classes such as stocks.
Anyone who is of legal age can invest in Vanguard bond funds. Both institutional and retail investors have access to the bonds market and can invest in bond funds.
Yes, Vanguard bond funds are a passive form of investment in the bond market, which is relatively less risky than other forms of investment. Moreover, they offer beginners a diversified bond portfolio that is managed by a professional, and the monthly interest is a good way to earn a steady income.
A bond is a debt obligation issued by a government or corporation, while a bond fund is a basket of multiple individual bonds traded as a single unit. So bond funds offer an easy way to get a diversified bond portfolio.
No. Whether you trade directly with Vanguard or trade via a broker, you get to trade during market hours on weekdays. However, some brokers may offer after-hours trading. Check with the broker you intend to trade with to find out the trading hours.
It depends. Most countries tax profits made from trading bond funds. However, there are tax-exempt bond funds, such as the Vanguard Tax-Exempt Bond ETF (VTEB). Please check your local taxation laws before trading.