This Affordable ETF Captures a Broad Slice of the Bond Market

Key Morningstar Metrics for Vanguard Total Bond Market ETF

• Morningstar Medalist Rating: Gold
• Process Pillar: Above Average
• People Pillar: Above Average
• Parent Pillar: High

Vanguard Total Bond Market ETF’s BND advantage comes from its razor-thin fee and expansive portfolio of US investment-grade bonds.

The exchange-traded fund tracks the Bloomberg US Aggregate Float Adjusted Index, which captures investment-grade, fixed-rate, taxable bonds denominated in US dollars. The index applies a minimum size requirement for each type of bond, which helps the index remain investable given the large asset base following it. While it captures a broad swath of the bond market, the index excludes certain types, such as inflation-linked bonds, Eurodollar bonds, non-ERISA-eligible commercial mortgage-backed securities, and bonds with equity features. It weights selected holdings by market value after reducing the amount outstanding for bonds held by the Federal Reserve to adjust for float.

This weighting scheme tilts the fund toward the largest issuers, resulting in a US Treasuries overweight compared with peers in the intermediate core bond Morningstar Category. The fund tends to have around 40% of its assets in these instruments compared with under 30% for the category average. A heavy dose of Treasuries also results in a high allocation to the highest rung of the investment-grade space. As of June 2024, the fund parked over 70% of its assets in bonds rated AA and above—around 10 percentage points higher than the category average.

This conservative risk allocation can help performance during credit shocks. For instance, the fund offered superior protection during both the 2008 financial crisis and the March 2020 coronavirus drawdown. However, it can lag when credit risk pays off, such as during the latter half of 2020. Active funds in the category can dip into riskier assets to find pockets of opportunities.

The index’s float adjustment steers it away from agency mortgage-backed securities compared with its category peers and the Bloomberg US Aggregate Bond Index, its non-float-adjusted counterpart. Still, this sector makes up around 20% of this fund’s portfolio, the third-largest sector after Treasuries and corporate bonds.

The fund’s average duration has steadily increased as it followed the trend in issuance activities. Owing to the historically low interest rates in recent years, companies have been borrowing more at the longer end of the yield curve. As of June 2024, the fund’s effective duration was around 6.0 years. Category peers tend to hold shorter-duration portfolios, so the fund tends to lag its peers when interest rates rise. Nonetheless, a broad scope and low fee should still provide a performance edge over category peers in the long run.

Vanguard Total Bond Market ETF: Performance Highlights

From its 2007 inception through June 2024, this ETF has outperformed the category average by 28 basis points annualized. Much of this outperformance comes from its conservative risk profile and overweighting in US Treasuries. This provided better protection during credit shocks as investors fled to the safe haven provided by Treasuries. For instance, the fund did significantly better than most of its category peers during the 2008 global financial crisis, outpacing the category average by 6.84 percentage points during the trough of the shock. Similarly, the fund beat its average peer by 2.13 percentage points during the covid-19 shock in early 2020.

The fund will lag category peers when risk pays off. It trailed the category average by 2.46 percentage points when credit spreads rapidly shrank between late March and December 2020.

The fund’s slightly higher average duration has caused underperformance when rates rise. During the last five months of 2016, the fund lagged the category average by 1.03 percentage points as yields rose on the back of fear over increasing interest rates. It also underperformed when yields on Treasuries rose during the first 10 months of 2018. The fund outperformed the category average by 20 basis points during 2022, however, as holding safer assets outweighed the fund’s relatively higher duration risk.