7 Best Vanguard Bond Funds to Buy

Before 1986, investors looking to incorporate bonds into their portfolios faced limited and often challenging options. They could directly purchase bonds over the counter, entrust the selection to a financial advisor or invest in an actively managed bond mutual fund. Each of these routes came with its own set of drawbacks.

Do-it-yourself investors often found themselves at a significant disadvantage in terms of information and expertise when competing with Wall Street's professional bond trading desks. Meanwhile, those relying on financial advisors or actively managed bond funds frequently saw a portion of their returns eroded by substantial sales loads and management fees.

The introduction of the first bond index fund by Vanguard in 1986 revolutionized the market by offering investors a new, more accessible path to bond investment. This innovation provided low-cost, diversified exposure to a broad range of taxable, investment-grade bonds across the U.S. market.

For the first time, self-directed investors had the tools to add a cost-effective bond allocation to their portfolios, leveling the playing field between individual investors and institutional desks.

By 2024, Vanguard's offerings in the bond space have expanded to include 114 options, encompassing both mutual funds and exchange-traded funds, or ETFs, most of which boast low fees and passively track a benchmark bond index.

"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 in 2024:

Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)

"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." When it comes to low fees, few bond mutual funds can match VBTLX, which charges a 0.05% expense ratio. For a $10,000 investment, this works out to around $5 in annual fees.

VBTLX tracks the Bloomberg U.S. Aggregate Float Adjusted Index, holding over 10,000 government Treasurys, mortgage-backed securities and investment-grade corporate bonds averaging a 4.6% yield to maturity and a 6.3-year duration. While it does require a $3,000 minimum investment, investors can sidestep that by buying the ETF version, the Vanguard Total Bond Market ETF (BND).

Vanguard Total International Bond ETF (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 fund can be paired with either BND or VBTLX for global diversification.

The Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index tracked by BNDX holds over 7,000 foreign-issued bonds, predominantly from developed markets like Japan, France, Germany, Italy, the U.K. and Canada. Investors can expect a 4.8% yield to maturity and a 7.3-year duration. The fund charges a 0.07% expense ratio and is currency-hedged to mitigate volatility from exchange rates.

Vanguard Short-Term Treasury ETF (VGSH)

"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."

One of the safest bond ETFs Vanguard offers when it comes to both interest rate and credit risk is VGSH. This ETF only holds U.S. government-issued Treasurys, which gives it an ironclad credit rating. All of the Treasurys held range in maturity from one to three years, which results in a low duration of just 1.9 years. VGSH pays a 4.3% yield to maturity and charges a 0.04% expense ratio.

Vanguard Ultra-Short Bond ETF (VUSB)

Investors looking to reduce interest rate sensitivity further without compromising on yield can use an actively managed bond fund like VUSB. This ETF targets a portfolio of mostly investment-grade corporate and asset-backed bonds with a weighted average maturity of 0 to 2 years. By doing so, it manages to achieve a low average duration of just 1 year, insulating it from interest rate shifts.

Compared to VGSH, VUSB also pays a higher 5.2% yield to maturity. However, this comes at the cost of greater credit risk. Because VUSB holds some bonds rated A and BBB, it technically has a higher risk of default compared to VGSH. Still, the ETF's overall credit rating is quite robust, although Vanguard cautions that it is not as low-risk as a money market fund. VUSB charges a 0.1% expense ratio.

Vanguard Tax-Exempt Bond Index Fund Admiral Shares (VTEAX)

"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." For this role, investors can consider VTEAX.

This fund tracks the Standard & Poor's National AMT-Free Municipal Bond Index, which holds a portfolio of over 10,000 municipal bonds exempt from federal income taxes and the federal alternative minimum tax. It features a high 59% allocation to AA-rated bonds and currently has a 5.6-year duration and 3.4% yield to maturity. VTEAX charges a 0.09% expense ratio and requires a $3,000 minimum investment.

Vanguard Core-Plus Bond Fund Investor Shares (VCPIX)

Some advanced Vanguard bond funds like VCPIX use a "core-plus" strategy in an attempt to outperform bond indexes. "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.

The "core" component of VCPIX targets a mixture of U.S.-issued investment-grade bonds for stability, while the "plus" component actively seeks out higher yields in non-investment-grade bonds and foreign bonds. Right now, investors can expect a 6.1-year average duration and 5.2% yield to maturity. However, due to the use of active management, VCPIX charges a higher 0.3% expense ratio.

Vanguard Core-Plus Bond ETF (VPLS)

"As the 'core' naming convention implies, for most investors an allocation to the strategy represents the centerpiece of their overall fixed-income allocation," Croke says. "Many investors allocate to these strategies as a singular turnkey fixed-income solution, allowing the professional money manager behind the fund to determine when it is best to alter interest rate, credit or sector-specific risks."

An alternative to VCPIX is VPLS, which despite having a similar naming convention is actually a separate, stand-alone fund. While it has the similar objectives of investment-grade core bonds augmented by high-yield international bonds, Vanguard cautions that VPLS' process when it comes to security selection and management can differ from VCPIX. The ETF charges a 0.2% expense ratio.