When you think about fixed-income expertise, firms like Pimco and Nuveen likely come to mind, with Pimco's co-founder Bill Gross famously known as "The Bond King" due to his management of the renowned Pimco Total Return Fund (ticker: PTTRX).
As the financial landscape has shifted, particularly with the steady rise in interest rates starting in 2022, bond investors are wearier than before. This change marked the end of the low-interest-rate environment that previously fueled a bond bull market for decades.
Now, bond investors looking for the usual combination of capital preservation and income potential care more about fees. Given how many rival firms have risen to challenge Pimco's dominance, expense ratios have become the primary battleground for fund inflows.
In this competitive environment, Vanguard stands out for its commitment to low costs. Known for its extensive brokerage platform and affordable fund options, Vanguard has significantly expanded its bond fund lineup in recent years.
The firm offers 114 mutual fund and ETF options in the fixed-income category, with expense ratios ranging from a mere 0.03% to 0.55% ($3 to $55 per year for every $10,000 invested). Whether you're looking for passive index funds, actively managed funds, or funds targeting specific issuers, maturities or geographies, Vanguard provides a robust selection.
"Vanguard's bond fund lineup covers a wide range of bond types, including government bonds, corporate bonds, municipal bonds and international bonds," says Wes Moss, managing partner and chief investment strategist at Capital Investment Advisors. "This breadth of options allows investors to create a well-diversified bond portfolio tailored to their specific investment goals and risk tolerance."
Here are seven of the best Vanguard bond mutual funds and ETFs to buy:
| Fund | Expense ratio |
| Vanguard Total Bond Market ETF (BND) | 0.03% |
| Vanguard Total International Bond ETF (BNDX) | 0.07% |
| Vanguard Total World Bond ETF (BNDW) | 0.05% |
| Vanguard Ultra-Short Bond ETF (VUSB) | 0.10% |
| Vanguard High-Yield Tax-Exempt Fund Investor Shares (VWAHX) | 0.17% |
| Vanguard Core-Plus Bond Fund Investor Shares (VCPIX) | 0.30% |
| Vanguard Short-Term Inflation-Protected Securities Index Fund Admiral Shares (VTAPX) | 0.06% |
Vanguard Total Bond Market ETF (BND)
"As with most things Vanguard, they are widely known as the low-cost fund provider when compared to their peers," Moss says. "When you keep your investment fees lower, you can improve total returns." A great example is BND, which charges a rock-bottom 0.03% expense ratio. A $10,000 investment in BND can be expected to incur just $3 in annual fees outside of potential brokerage commissions.
This ETF tracks the Bloomberg U.S. Aggregate Float Adjusted Index, a broad domestic bond market benchmark that holds over 11,000 Treasury, agency, mortgage-backed and investment-grade corporate bonds of multiple maturities. Overall, it averages out to an intermediate duration (a measure of interest-rate sensitivity) of 6 years and a 5.3% yield to maturity (a measure of expected total returns).
Vanguard Total International Bond ETF (BNDX)
A great Vanguard bond ETF to pair with BND is BNDX. "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 holds about 6,800 bonds from both developed and emerging markets via the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index. The ETF is hedged to dampen volatility arising from fluctuations in exchange rates between the U.S. dollar and other currencies. Currently, investors can expect a 7.2-year duration, a 5.1% yield to maturity and a 0.07% expense ratio.
Vanguard Total World Bond ETF (BNDW)
Looking to simplify bond investing even further while attaining maximum diversification? Instead of combining BND and BNDX, investors can let Vanguard do the work by buying BNDW. For a 0.05% expense ratio, this ETF aims to replicate the Bloomberg Global Aggregate Float Adjusted Composite Index by holding BND and BNDX in a roughly 50/50 allocation.
With BNDW, investors can gain exposure to about 18,000 government and corporate bonds from across the world, ensuring that over the long run, their returns will mirror the average of the global bond market. Currently, this ETF delivers a 5.2% yield to maturity and a 6.6-year average duration. As with most Vanguard bond ETFs, BNDW also pays distributions on a monthly basis.
Vanguard Ultra-Short Bond ETF (VUSB)
"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 Vanguard's 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."
VUSB is an ETF that puts both of these considerations into play. By focusing on short-term, investment-grade corporate and asset-backed bonds, this ETF manages to deliver low interest rate sensitivity with a one-year average duration while still providing a competitive 5.8% yield to maturity. However, Vanguard cautions that this ETF is not meant to be a substitute for a safer money market fund.
Vanguard High-Yield Tax-Exempt Fund Investor Shares (VWAHX)
"Another question to ask when considering bond funds for your portfolio is whether you're investing outside of an individual retirement account or other tax-advantaged retirement account," Tidmore says. "If you're in a high tax bracket and investing outside of your retirement account, a tax-exempt bond fund could help reduce tax exposure." A fund that could work in this scenario is VWAHX.
This bond fund is actively managed and does not track a benchmark index. Instead, Vanguard's portfolio management team picks a portfolio of 80% investment-grade municipal bonds, while using the remaining 20% to target non-investment-grade bonds with more risk but higher yields. The result is a tax-efficient 4.2% yield to maturity, which is high compared to most municipal bond funds.
Vanguard Core-Plus Bond Fund Investor Shares (VCPIX)
Investors looking to outperform passive bond index ETFs like BND may be interested in a "core-plus" fund like VCPIX. "The strategy provides diversified exposure primarily to the U.S. investment-grade bond market, with the flexibility to opportunistically invest in high-yield corporate and emerging market bonds up to a 35% limit," says John Croke, head of active fixed-income product management at Vanguard.
VCPIX's "core" is composed of Treasurys as well as mortgage-backed and investment-grade corporate bonds similar to those in BND.But it also has a "plus" component that targets high-yield and emerging-market bonds to enhance yield. Investors can expect a 5.6-year duration and a 5.8% yield to maturity. The fund charges a 0.3% expense ratio and has a $3,000 minimum required investment.
Vanguard Short-Term Inflation-Protected Securities Index Fund Admiral Shares (VTAPX)
Investors worried about further unexpected upticks in inflation may find a bond fund like VTAPX to be useful. This fund holds a portfolio of Treasury inflation-protected securities, or TIPS, with less than five years to maturity. Unlike regular Treasurys, the price of TIPS – and thus their coupon payments – are adjusted periodically to reflect changes in inflation, specifically as measured by the consumer price index.
Therefore, a fund like VTAPX may be particularly suitable for lower-risk investors with a shorter time horizon. For example, retirees relying on their portfolio for income can use VTAPX to ensure that inflation does not erode the real value of the invested capital and interest income. VTAPX pays a 4.9% yield to maturity against an average duration of 2.5 years. The fund charges a 0.06% expense ratio.
