Does your investment portfolios level of volatility keep you awake at night? If so, you may want to consider an<\/p>\n
Does your investment portfolios level of volatility keep you awake at night? If so, you may want to consider an allocation to bonds. <\/p>\n
Aside from a dismal year in 2022 as interest rates rose sharply, bonds have historically played an important role in portfolio management. <\/p>\n
Due to their lower correlation with stocks and steady cash flows, bonds can provide ballast for investors, helping to reduce volatility and minimize drawdowns. For investors, bonds smooth out the long-term ups and downs of a portfolio and help target a steadier sequence of returns. <\/p>\n
That being said, investing in bonds can be difficult, given that they trade over the counter. Pricing bonds requires a good deal of math, and trading individual issues tends to be less intuitive and convenient compared to trading stocks on an exchange. <\/p>\n
[Sign up for stock news with our Invested newsletter.] <\/p>\n
A much more viable alternative for retail investors is a bond fund, which includes bond mutual funds and bond exchange-traded funds, or ETFs. These funds hold an underlying basket of bonds selected according to different rules, which provides diversified exposure in a single investment. <\/p>\n
While most asset managers will have a bond lineup, few rival the cost-effectiveness that Vanguard provides. The firm made fixed-income history in 1986 when it unveiled the industrys first bond index fund, which dramatically lowered costs for investors compared to existing actively managed bond funds. <\/p>\n
As with most things Vanguard, they are widely known as the low-cost fund provider when compared to their peers, says Wes Moss, managing partner and chief investment strategist at Capital Investment Advisors. When you keep your investment fees lower, you can improve total returns. <\/p>\n
Currently, Vanguards bond lineup spans 110 different fixed-income products, 89 of which are mutual funds with the remaining 21 consisting of ETFs. This, coupled with expense ratios as low as 0.03%, means few asset managers can rival Vanguards commitment to low fees and variety. <\/p>\n
Vanguards bond fund lineup covers a wide range of bond types, including government bonds, corporate bonds, municipal bonds and international bonds, Moss says. This breadth of options allows investors to create a well-diversified bond portfolio tailored to their specific investment goals and risk tolerance. <\/p>\n
Heres a look at seven of the best Vanguard bond mutual funds and ETFs to buy in 2023: <\/p>\n
Vanguard Total Bond Market ETF (BND) <\/p>\n
Investors who are not interested in a specific type, maturity or credit quality of bond can opt to simply invest in all of them via BND. This ETF tracks the Bloomberg U.S. Aggregate Float Adjusted Index, which invests in a wide swath of bonds ranging from U.S. Treasurys to investment-grade corporate bonds of various maturities. Its portfolio of over 10,000 individual bonds comes with an expense ratio of just 0.03%. <\/p>\n
Currently, BND offers an average yield to maturity, or YTM, of 4.8%, which is the theoretical return an investor can expect should all of its underlying bonds be held until maturity. Against this is an average duration a measure of interest rate sensitivity of 6.5 years. Should rates rise by 100 basis points, BND is expected to lose 6.5% in value, all else being equal. The opposite will occur if rates are cut. <\/p>\n
Vanguard Total International Bond ETF (BNDX) <\/p>\n
BNDX offers diversification benefits by including investment-grade bonds issued by governments and corporations outside the United States, and thus provides exposure to international bonds denominated in various currencies, says Michael Ashley Schulman, partner and chief investment officer at Running Point Capital Advisors. This ETF is essentially the international variant of BND. <\/p>\n
By diversifying a bond allocation internationally, investors can benefit from different interest rate regimes in foreign countries, and hedge the remote-but-potentially-devastating risk of the U.S. bond market collapsing. In addition, BNDX is currency-hedged to mitigate foreign exchange rate fluctuations. The ETF pays a YTM of 5.3%, has an average duration of 7.5 years and charges a 0.07% expense ratio. <\/p>\n
Vanguard High-Yield Corporate Fund Investor Shares (VWEHX) <\/p>\n
BND includes investment-grade corporate bonds that are rated BBB or higher by two or more of the major credit rating agencies. While less at risk of default, they dont offer the highest yields. Investors seeking the highest possible income might consider a high-yield bond fund like VWEHX, which holds non-investment grade bonds and currently pays a YTM of 7.1% <\/p>\n
This fund aims to provide potentially higher income through exposure to bonds with higher credit risk by investing in lower-rated, high-yield corporate bonds, Schulman says. <\/p>\n
Some 48.3% of VWEHXs bonds are rated BB, and 34.3% are rated B. The fund charges a 0.23% expense ratio. <\/p>\n
Vanguard Total Corporate Bond ETF (VTC) <\/p>\n
Investors who want to strike a better balance between high credit quality and high yields can find middle ground between Treasurys and high-yield bonds with investment-grade corporate bonds. A highly diversified ETF offering exposure to a wide swath of the U.S. investment-grade market is VTC, which currently holds over 7,200 individual issues by tracking the Bloomberg U.S. Corporate Bond Index. <\/p>\n
VTC uses a balanced ETF of ETFs structure by allocating 39% to the Vanguard Short-Term Corporate Bond ETF (VCSH), 27.4% to the Vanguard Intermediate-Term Corporate Bond ETF (VCIT) and 33.6% to the Vanguard Long-Term Corporate Bond ETF (VCLT). The end result is a YTM of 5.5% against an average duration of 7.2 years. VTC charges a 0.04% expense ratio. <\/p>\n
Vanguard Long-Term Treasury Index Fund Admiral Shares (VLGSX) <\/p>\n
Investors need to understand the two main types of risk inherent in fixed income investing before selecting a bond fund, says Chris Tidmore, senior manager at Vanguards Investment Advisory Research Center. Bond funds with long-term maturities are more sensitive to changes in interest rates, while a lower credit quality in the underlying bonds also impacts the riskiness of a particular fund. <\/p>\n
By selecting the right bond fund, investors can tailor their exposure to each of these metrics. For investors looking to bet on falling interest rates now that the Federal Reserve has hiked interest rates to 22-year highs, the bond fund to consider is VLGSX. This fund holds Treasurys with an average duration of 16 years, making it likely to benefit from future cuts in rates. It charges a 0.07% expense ratio. <\/p>\n
Vanguard Tax-Exempt Bond ETF (VTEB) <\/p>\n
Another question to ask when considering bond funds for your portfolio is whether youre investing outside of an individual retirement account or other tax-advantaged retirement account, Tidmore says. If youre in a high tax bracket and investing outside of your retirement account, a tax-exempt bond fund could help reduce tax exposure. For this, Vanguard offers VTEB at a 0.05% expense ratio. <\/p>\n
VTEB tracks the Standard & Poors National AMT-Free Municipal Bond Index, which as its name suggests primarily holds municipal bonds exempt from both federal income taxes and the federal alternative minimum tax. The underlying municipal bonds in this ETF sport a high credit rating, with the majority sitting at AA. VTEB currently pays a 3.5% YTM against an average duration of 5.8 years. <\/p>\n
Vanguard Ultra-Short Bond ETF (VUSB) <\/p>\n
All of the previous Vanguard bond funds are passively managed, meaning that theyre strictly benchmarked to the composition and returns of an underlying index. Vanguard also offers a range of actively managed bond funds, which aim to outperform their benchmark and are known for their relatively low fees compared to their peers, Moss says. <\/p>\n
One example is VUSB, which actively manages a portfolio of short-term investment-grade corporate bonds. As an actively managed ETF, VUSB does not replicate an index. Rather, its managers pick bonds according to their own strategy, with the goal of minimizing volatility and targeting higher yields. VUSB currently pays a YTM of 5.8%, has an average duration of 0.9 years and charges a 0.10% expense ratio. <\/p>\n
[READ: 5 Great Fixed-Income Funds to Buy for 2023] <\/p>\n
More from U.S. News <\/p>\n
7 of the Best Fidelity Bond Funds to Buy for Steady Income <\/p>\n
5 Best Bond Funds for Retirement <\/p>\n
The Ultimate Guide to Bonds <\/p>\n
7 Best Vanguard Bond Funds to Buy originally appeared on usnews.com <\/p>\n
Update 08\/02\/23: This story was previously published at an earlier date and has been updated with new information. <\/p>\n
<\/p>\n
Read more from the original source:<\/p>\n
7 Best Vanguard Bond Funds to Buy - WTOP<\/a><\/p>\n","protected":false},"excerpt":{"rendered":" Does your investment portfolios level of volatility keep you awake at night? If so, you may want to consider an Does your investment portfolios level of volatility keep you awake at night? Continue reading