The Vanguard Total Bond Market Index Fund (BND) Rating ReportSeptember 13th, 2012 by David Waring
Category: Core Bond Funds
LB Rating: ***** 5 Stars
Last Updated: 9/11/12
Vanguard Total Bond Market Index Fund Overview
Summary: If you wanted to own one bond fund to gain the benefits of diversifying beyond stocks, we recommend the Vanguard Total Bond Market Index Fund (BND). This super-low fee fund (0.10% annual expense ratio) will mirror the performance of the US investment grade bond market.
Commentary: Interest rates are currently low, extremely low. The 10 year treasury is paying less than 2.0%. The Federal Reserve has stated they plan to keep rates low for the next couple of years. The 10 year rate will probably bounce between 1.4% and 2.4%. In this environment where rates are low and likely to move in a narrow range, the name of the game is keeping expenses low. BND delivers.
With a yield below 2.0%, The Vanguard Total Bond Market Index Fund does not look attractive from an income perspective. However, investors should keep in mind that to get more interest, one will need to take on more risk. Over ⅔ rds of BND is invested in US government backed bonds. With the exception of funds that solely invest in Treasuries or agency MBS, you are unlikely to find a fund with a lower credit risk than BND.
The other major risk is interest rate risk. For every one percent rise in interest rates, The Vanguard Total Bond Market Index Fund should lose about 5% of its value. While this may sound scary, BND represents a balance between the conflicting goals of earning higher yields and limiting negative exposure to rising interest rates. Most funds that would lose less than 1% of its value if interest rates rose by 1%, would provide a yield of less than 0.25%. On the other hand, mosts funds which pay 1% more yield would lose 20% of its value if interest rates rose 1%.
The Vanguard Total Bond Market Index Fund (BND) Rating Criteria
Fees: Excellent The Vanguard Total Bond Market Index Fund charges 1/10th percent in annual expenses. This is the lowest core bond fund expense ratio that we are aware of. You can learn more about bond ETF fees here.
Tracking: Excellent Over 3 and 5 year time periods, around 99% of the ETF’s performance can be attributed to changes in the bond index it tracks (The Barclays Capital U.S. Float Adjusted Bond Index). The index it tracks does an excellent job tracking the US investment grade bond market, excluding municipal bonds.
Liquidity: Excellent The Vanguard Total Bond Market Index Fund has over $100 billion in assets and typically trades at a price that is very, very close to its NAV.