Are you saving for something big? Do you want to start investing for retirement? If you’re looking for steady financial growth, bond funds can offer you a growth-oriented strategy. Bond funds become more popular every day, and the best Vanguard bond funds, in particular, are an excellent alternative to active trading.
Quick Look: The Best Vanguard Bond Funds of This Year
- Vanguard Long-Term Investment-grade Fund Investor Shares (VWESX)
- Vanguard Short-Term Investment-Grade Fund Investor Shares (VFSTX)
- Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)
- Vanguard Short-Term Corporate Bond Index Fund Admiral Shares (VSCSX)
- Vanguard High-Yield Corporate Fund Investor Shares (VWEHX)
Table of contents [Hide]
- Overview: What Are Bond Funds?
- What Makes a Good Bond Fund
- 1. Vanguard Long-Term Investment-grade Fund Investor Shares (VWESX)
- 2. Vanguard Short-Term Investment-Grade Fund Investor Shares (VFSTX)
- 3. Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)
- 4. Vanguard Short-Term Corporate Bond Index Fund Admiral Shares (VSCSX)
- 5. Vanguard High-Yield Corporate Fund Investor Shares (VWEHX)
- Final Thoughts
Overview: What Are Bond Funds?
For certain investors, bond funds make sense because they’re a pool of single bond securities controlled by professional fund managers, which form a diversified portfolio.
In other words, no eggs exist in a single basket. You keep your eggs in many baskets. If one of the baskets fails, you won’t fall victim to fatal financial damages, because the other baskets are still in play.
But if you invest only in a single bond security and the basket falls. Unlike single bond securities, bond funds do not mature. Instead, investors receive interest on a regular basis.
What Makes a Good Bond Fund
The best bond funds maintain a low or at least a decent expense ratio. For example, 2.5% per year sounds really low-cost, right? Investing is not that simple and every sign after the decimal matters!
Let’s say you invest $150,000 in a bond fund for 25 years with 5.5% interest per year. If there are no costs, you will get approximately $572,000 after 25 years. But what happens if you pay this cost of 2.5% per year? After 25 years, you’ll end up with approximately $314,000. In the first example, you earn $422,000 in 25 years.
In the second example, you earn 164,000. These 2.5% for 25 years equal to $258,000. The expense ratio will always exist, but you have control over every digit after the decimal, depending on which brokerage you choose.
Reward to Risk
Usually, the riskier the investment, the more returns it could bring, but steady bond funds with small but consistent returns may be a solution. The more volatile bond funds are, the more suitable they are for longer-term investments. Opposite to this, the less-risky funds might be a better solution for short-term investing.
Some earnings from bonds are taxable, including corporate bonds and Treasuries, but some bond funds might be easier on taxes. Do deep research to find out if the bond fund you’re considering is easier on taxes.
When you invest in bond funds, you expect financial obligations to be met. The bond rating is a good key performance index of how likely this is to happen. Good bond funds will consist of bonds with a rating of BBB or higher.
The minimum investment required is not an indication of the bond’s decency, but bonds without or with lower minimum investment are, of course. more attractive.
1. Vanguard Long-Term Investment-grade Fund Investor Shares (VWESX)
This fund contains high and medium rating corporate bonds with a higher maturity – between 15 and 25 years. This is a long-term bond fund of 835 bonds with an average effective maturity of 22.2 years.
The 30-day SEC yield of the fund is 4.25% as of December 13, 2018. The expense ratio is 0.22%, which is very low, but usual for the top Vanguard funds. The minimum investment required is $3,000.
The fund maintains an average risk potential of 3 out of 5. It is suitable for investors, who are looking to meet long-term financial goals.
Its low expense ratio and decent yield make it one of the most attractive bond funds.
2. Vanguard Short-Term Investment-Grade Fund Investor Shares (VFSTX)
This fund counts on high- and medium-rated investment-grade bonds with a short-term maturity. The fund consists of U.S. government bonds, corporate bonds and unified consumer loans.
This is a short-term bond fund of 1,831 bonds and an average effective maturity of 3.4 years. The 30-day SEC yield of the fund is 3.35% as of December 13, 2018. The fund has an expense ratio of 0.20% and requires a minimum investment of $3,000.
The VWESX fund maintains a very low-risk potential – 1 out of 5. It is suitable for investors that seek to meet short-term financial goals.
3. Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)
VBTLX is a bond fund that contains investment-grade bonds from the United States made up of 70% U.S. government bonds and 30% corporate bonds. VBTLX consists of 8,601 bonds and has an average effective maturity of 8.3 years.
The 30-day SEC yield is 3.33% as of December 13, 2018. The expense ratio is only 0.05% and the minimum investment required is $3,000.
This is a very low-cost investment opportunity which also has a decent yield. The Total Market Index Fund has a risk potential of two out of five, which makes it a good alternative for mid-term investments.
A rise in the rates is likely to pressure the price down as it reflects the net asset value of the fund. Since the VBTLX fund covers a variety of market segments and maturity periods, it could be a good base for your portfolio.
4. Vanguard Short-Term Corporate Bond Index Fund Admiral Shares (VSCSX)
The Corporate Bond Index Fund of Vanguard unifies bonds of companies in the industry, utility, and the financial sectors. The fund pursues companies with a maturity between one and five years.
There are 2,210 bonds in the fund with an average effective maturity of 2.9 years. The fund’s 30-day SEC yield is 3.7% as of December 13, 2018. The expense ratio is one of the lowest at 0.7% and the minimum investment is $3,000.
The risk potential of the VSCSX bond fund is the lowest, at one out of five. This makes the fund a suitable alternative to meet short-term financial goals. At the same time, you get one of the best expense ratios and a great yield for these conditions.
The low risk and the low maturity of the bonds in the fund make it a great choice for a short-term investment. Again, we have an allocation with the domestic interest rates where changes are likely to affect the price of the fund.
5. Vanguard High-Yield Corporate Fund Investor Shares (VWEHX)
This fund consists of corporate bonds with medium and low ratings, which are also called “junk bonds.” It tries to get to the better junk bonds available to ensure a higher yield.
The fund contains 474 bonds with an average effective maturity of 5.8 years. The 30-day SEC yield is 6.38% as of December 13, 2018. The expense ratio of the fund is 0.23%, which is the highest we’ve researched; it’s still very low compared to other available bond funds. The minimum investment required is $3,000.
The VWEHX fund has high volatility. Although the fund is diversified, the volatility resembles the stock market. This is a bit higher risk bond fund with a risk potential of three out of five.
Investing in this fund is not a good stand-alone strategy but it fits well in portfolios that are already diversified as its higher yield can bring an extra financial touch. Its high yield and low expense ratio make it one of the best junk bond funds available.
Vanguard bond funds are one of the preferred investment instruments for accomplishing future financial goals. The five different funds that Benzinga suggested cover five different financial goals.
These five bond funds set the basis of your portfolio. In any case, the Vanguard bond funds distinguish by having an extremely low expense ratio. In most of the cases, it is 70-90% better than the competition. This makes your choice easier as the low cost is likely to bring higher returns.
Summary: Best Vanguard Bond Funds
|Bond Fund||Best For|
|Vanguard Long-Term Investment-grade Fund Investor Shares (VWESX)||Steady long-term growth with a decent risk and expense ratio|
|Vanguard Short-Term Investment-Grade Fund Investor Shares (VFSTX)||Meets short-term goals with higher risk, good yield, and low expense ratio|
|Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)||Extremely low expense ratio as the main priority|
|Vanguard Short-Term Corporate Bond Index Fund Admiral Shares (VSCSX)||Very low risk in focus|
|Vanguard High-Yield Corporate Fund Investor Shares (VWEHX)||Highest possible yield|