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Vanguard Total Bond Market ETF (BND) is a bond exchange-traded fund (ETF) launched in 2007 and managed by Vanguard. The fund seeks to track the performance of the Bloomberg Barclays U.S. Aggregate Bond Index as its benchmark against which the returns are compared. The index is a broad-based benchmark that includes investment-grade bonds from various sectors of the U.S. bond market, including government, corporate, and municipal bonds. It is worth mentioning that most of the bonds in the basket of the BND are taxable bonds, which means that the fund excludes any inflation-protected or non-taxable bonds.
- 1 Characteristics, Performance Analysis, and Expectations
- 2 How to invest in Vanguard Total Bond Market ETF?
- 3 How to Invest in Vanguard Total Bond Market ETF (BND)
- 4 Risks associated with BND
- 5 Conclusion
- 6 FAQs
Characteristics, Performance Analysis, and Expectations
Vanguard Total Bond Market ETF offers investors a way to gain passive exposure to the U.S. bond market through a single investment, unlike the traditional way of constructing your own portfolio by cherry-picking each bond.
BND has an expense ratio of 0.03%, which is lower than the average expense ratio for the ETF market which falls between the 0.2% – 0.4% range. Vanguard is known for its ability to offer low-cost index ETFs that are passively replicating the index performance and here is another example of such an investment that is meant for the long-term investor who looks for a relatively stable and income-generating asset.
Vanguard Total Bond Market ETF has some key elements which are listed below:
- Total net asset value (NAV) is almost USD 280 billion.
- The current trading price of around USD 74 per share.
- It has more than 10,000 bonds included in the basket vs more than 13,000 in its benchmark.
- The average effective maturity of the bonds in BND is almost 9 years vs 8.5 years for the benchmark.
Since most of the bonds have maturity which is the time when the bond will pay back all the obligations, BND is keeping the bonds around the medium to long-term part of the yield curve. This is slightly longer than the average effective maturity of the benchmark index. It can be particularly attributed to the fact that the ETF holds fewer bonds in its portfolio than the index so it might be the case that BND is trying to expose itself more towards the longer maturity part of the yield curve.
Even though it has fewer positions than the benchmark the BND ETF is matching the average coupon of the benchmark which is around 2.8%. So overall the yield to maturity (YTM) of the BND is at 4.6% which is also closely matched with the benchmark of 4.7%.
Vanguard Total Bond Market ETF has the below composition at the moment we write this:
- More than 67% of the assets are invested in US Government Bonds
- The rest is allocated amongst AAA, AA, A, and BBB-rated bonds.
- Out of which around 46% are in treasury/agency bonds.
- Another 20% are in government mortgage-backed securities.
The BND had a year-to-date (YTD) performance of about 2.5% which compared to the broad market return is more than twice lower since the S&P 500 generated a YTD return of 6.5%. The overall market rebound and softening inflation are definitely playing their part in the overall market comeback. However, here in the case of the BND and overall bond market, we have a stronger emphasis in terms of the future interest rate paths since investors in the bond markets are adjusting their positions on the yield curve based on the expectation of where the interest rates are going to be within the time period.
Overall bond markets are less volatile alternatives and historically before the global pandemic, they worked as a good hedge for your equity portfolio thanks to the negative correlation to the equity market performance. However, in 2022 for example the BND performance was -12% vs the S&P 500 performance of -20% which is not in line with the historical theory of being negatively correlated. Nevertheless, it is still lower volatility and less magnitude of the drawdown than in the case of the S&P 500.
Since inflation is slowing down investors are expecting to see less aggressive rate hikes by the Fed which can bring additional flows to the bond market but less of that compared to the equities since we are still expecting to see interest rate hikes this year. Given the bond prices are inversely related to the interest rate moves the rising interest rates will mean lower prices for the bonds and hence deteriorated performance for the Vanguard Total Bond Market ETF.
However, in the case of the interest rate hikes by the central banks, the bonds that are affected the most are the short-maturity bonds which are at the short end of the yield curve. Thus, most of the investors in the bond markets in this situation are exposing themselves to the longer-dated bonds or the long end of the yield curve with the hope that over the long time period, the yield curve will stabilize.
Thus BND is meant for long-term investors who are looking for fixed-income assets and trying to diversify away from equities while at the same time generating some income front the coupon payments.
How to invest in Vanguard Total Bond Market ETF?
Depending on your location you might be able to open an account with Vanguard directly to invest in BND. In case it is not possible, you will have to check with your banking services provider to see whether their brokerage account offers BND as an investment. You might also compare the fees of traditional brokerage account providers to those of online brokerages to have an alternative view. Companies such as eToro and other have BND stocks listed on their platforms for trading so it can be a potential target for you. Below are the steps on how to open an account with eToro and invest in BND:
- Create an account with eToro using either the website or the mobile app.
- Fill in all the required fields when it comes to your personal information.
- Share your scanned ID with eToro to get your account verified.
- Transfer fiat money from your bank account to eToro.
- Search for BND and buy the amount you want.
Before making any investment decision it is worth checking what are the constituents of the ETF and whether those meet your requirements especially by looking at what part of the yield curve the exposure is. Here is the current allocation at the time we write this:
- 1-5 years – 40% of the portfolio value
- 5-10 years – 31% of the portfolio value
- 10-15 years – 12% of the portfolio value
- Over 25 years – 8% of the portfolio value
The rest of the portfolio is allocated between 15 and 25 years and a very small allocation falls under 1 year. This might change over time depending on the market conditions so make sure to check the allocation together with other characteristics of the BND before making any investment decision.
How to Invest in Vanguard Total Bond Market ETF (BND)
If you’re looking to invest in Vanguard Total Bond Market ETF (BND), eToro is one of the best online brokers available. With a strong reputation and a diverse range of options for both beginners and professional traders, eToro makes it easy to buy and trade BND. In this mini guide, we’ll walk you through the steps to open an account on eToro and start investing in Vanguard Total Bond Market ETF (BND).
Step 1: Open your Personal Account
To open an account on eToro, go to the eToro homepage (https://www.etoro.com/) and click on the “Join Now” or “Sign Up” button. You’ll be redirected to the registration page, where you’ll need to fill out your personal information, such as your name, email address, and phone number. You’ll also need to create a username and password. Once you’ve completed the form, click “Sign Up” to create your account.
Step 2: Upload ID
To verify your identity, you’ll need to upload proof of identification. This can be a government-issued ID or passport. To do this, log in to your eToro account, navigate to the verification section, and follow the prompts to upload a clear photo or scan of your ID.
Step 3: Make a Deposit
Before you can start trading, you’ll need to fund your account. To make a deposit, log in to your eToro account, and click on the “Deposit Funds” button. You’ll be prompted to choose your preferred deposit method, which can include credit/debit card, wire transfer, or e-wallets like PayPal, Skrill, or Neteller. Enter the amount you’d like to deposit and follow the instructions to complete the transaction.
Step 4: Search for BND
To search for Vanguard Total Bond Market ETF (BND) on eToro’s platform, log in to your account and use the search bar at the top of the page. Type “Vanguard Total Bond Market ETF” or “BND” into the search bar and press enter. The BND ETFs listing should appear in the search results.
Step 5: Buy BND
Once you’ve found the BND ETF listing, click on it to access the stock’s information page. Here, you’ll find important information about the ETFs, such as its performance, news, and analysis. To buy BND, click on the “Trade” button, enter the amount you’d like to invest, and set any additional parameters, such as stop loss or take profit orders. Finally, click on “Open Trade” to execute the transaction.
Risks associated with BND
The risk of market factors moving adversely against your portfolio is called market risk. In the case of the bond ETF such as the Vanguard Total Bond Market ETF, it is mostly related to the interest rate and economic outlook – two key factors which largely determine the bond prices.
Central bank decisions regarding rate hikes are one of the key factors why the bond prices may drop thus impacting the BND price. This is an expected event for 2023 so investors in BND should carefully consider this and other factors before investing in any bond ETF.
Other market events such as high inflation, geopolitical events, or company-specific – idiosyncratic factors may cause the bond prices to fluctuate, thus proper analysis of the current market situation is required before investing in the markets.
The risk of the counterparty failing to pay the obligation is associated with credit risk. It is more pronounced in the case of bonds since companies that issue the bonds have the obligation usually to pay periodic coupons and the face value of the bond at maturity. Therefore, the credit risk here is associated with the company whose bonds are included in the BND failing to meet one or more of those obligations which might lead to bankruptcy and thus investors losing part or entire capital invested.
The risk of not being able to convert the investment into cash quickly is associated with liquidity risk. Unlike equities, liquidity risk is more of a concern for bonds since those are usually traded on the secondary over-the-counter markets which are not as active as the primary bond market or the exchange market. However, since BND is an exchange-traded fund it somewhat covers the liquidity risk for investors since it is traded in the stock exchange where the price is determined by supply and demand. Since BND is traded quite actively with relatively large volumes of about 7 million shares on average for the past 50 days, this makes the liquidity risk less of a concern for the direct investor in BND but it should be a concern for BND ETF managers to consider when deciding how much cash to keep aside.
The risk associated with incorrect pricing of financial instruments is associated with the valuation risk. Unlike stocks, valuation risk is more visible in the case of bonds where due to the illiquidity of the secondary market it may incorrectly determine the price of a bond. However, trading through BND you are more concerned about the BND valuation which is traded in the exchange, and the price is determined by supply and demand hence the valuation risk for the investor is relatively low. But the valuation risk is more pronounced for the BND to consider when making investments in bonds.
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Vanguard Total Bond Market ETF is an exchange-traded fund managed by Vanguard that is trying to passively replicate the performance of the Bloomberg Barclays U.S. Aggregate Bond Index. It is less volatile than the stock ETFs given the underlying instruments are mostly bonds which are investment grade with allocation to the government and agency bonds. The average maturity of the bonds in the basket is close to 9 years which means that most of the allocations are in the middle to the long end of the yield curve.
The fund is a good alternative for those who are looking for less volatile returns and income generation possibilities in the long run. Nevertheless, it is recommended to research the characteristics and risks such as market, credit, liquidity, and valuation before investing in BND.
Why is the average tenor around the mid to long end of the yield curve?
Given the current market uncertainty around the inflation and interest rate hikes, the bond has a slightly longer maturity than its benchmark since in the case of rate hikes the largest impact is in the short end of the yield curve.
Why is the historical bond vs stock negative correlation no longer in place?
The markets evolve over time and new economical or geopolitical events such as wars, pandemics may cause the assets to diverge from their typical historical behavior which we currently see for bonds and stocks.
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