High inflation and rising interest rates have hit bond portfolios hard, with core bond funds down 15% to 20% this year. For wary investors who still want broad-based fixed income exposure in their portfolios, they may want to use more targeted fixed income ETFs.
Vanguard’s head of active fixed income product management John Croke suggested that long-term investors looking to add fixed income exposure to their portfolios should look into ETFs that track the Bloomberg US Aggregate Bond Index. The Wall Street Journal reported that the duration on the Agg is currently around 6.5 years while yields on index funds tracking the index are roughly 4.2% to 4.4%.
“Out of the box, the Agg gives you broad, diversified exposure to a liquid universe of U.S. fixed income across U.S. Treasurys, investment-grade corporates, and agency mortgages,” Croke told the Journal.
The Vanguard Total Bond Market Index Fund ETF Shares (BND) offers an all-inclusive approach to getting core exposure. BND, which carries an expense ratio of 0.03%, seeks the performance of the Bloomberg U.S. Aggregate Float Adjusted Index, which represents a broad spectrum of public, investment-grade, taxable, fixed income securities in the U.S., including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than one year. While it holds securities of all maturity lengths, BND is heavily weighted towards the short end of the curve.
Investing Overseas
International bonds can also provide a diversification tool for fixed income investors looking to supplement their current core portfolio. “Investing outside of the U.S. fixed-income markets is [also] a great way to extend the diversification of a bond,” Croke added.
So, for investors looking for global fixed income coverage, there’s the Vanguard Total World Bond ETF (BNDW) and the Vanguard Total International Bond Index Fund ETF Shares (BNDX).
BNDW seeks to track the performance of the Bloomberg Global Aggregate Float Adjusted Composite Index, which measures the investment return of investment-grade U.S. bonds and investment-grade non-U.S. dollar-denominated bonds. BNDW, which carries an expense ratio of 0.06%, can be ideal for investors who want exposure to international debt markets but don’t want to completely disregard the U.S. bond market.
Meanwhile, BNDX seeks to track the performance of a benchmark index that measures the investment return of non-U.S. dollar-denominated investment-grade bonds. With an expense ratio of 0.08%, BNDX employs an indexing investment approach designed to track the performance of the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged), which provides a broad-based measure of the global, investment-grade, fixed-rate debt markets.
For more news, information, and strategy, visit the Fixed Income Channel.
