Contributor, Benzinga
July 16, 2023

With the stock market taking a hit this year, many investors may be looking at other markets and asset classes to invest their funds. The bond market may be a second option for traders as it tends to provide a fixed income with less risk.

However, like stocks, bonds have also suffered losses this year.

Now may be a great time to invest in bonds and, more specifically, bond exchange-traded funds (ETFs). Vanguard offers two bond ETFs that may be a great choice in the long run.

Vanguard Bond ETFs

Bond ETFs are a type of ETF that exclusively invests in bonds. They typically trade like stock ETFs on major stock exchanges and are passively managed. Vanguard offers investors the opportunity to choose from various ETFs, and two Vanguard Bond ETFs are listed below.

Vanguard Total Bond Market ETF (NASDAQGM: BND)

The Bloomberg U.S. Aggregate Float Adjusted Index is an unmanaged benchmark representing the entire investment-grade U.S. bond market. The Vanguard Total Bond Market ETF aims to mirror the investment performance of this index.

The fund invests in taxable investment-grade corporate, U.S. Treasury, mortgage-backed and asset-backed securities with short, intermediate and long maturities in excess of one year, resulting in a portfolio of medium-term duration.

The BND has an expense ratio of 0.03% to cover the ETF’s operating costs. This percentage is deducted from dividend and capital gains distributions.

The ETF currently has a market price of $70.13 after producing year-to-date returns of -15.79%. Bonds have been significantly impacted by inflation this year, and rate hikes from the Fed have caused bonds to suffer some of their worst losses in decades.

As a result, BND may be a significant opportunity to enter the bond market at a discounted price. The fund holds total net assets of $271.09 billion with the biggest holding in United States Treasury Notes.

The fund's top sectors include government, corporate bonds and agency mortgage-backed. The ETF holds a total of 91.13% in U.S. bonds.

Vanguard Total International Bond ETF (NASDAQGM: BNDX)

The Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index is the investment performance benchmark that the Vanguard Total International Bond ETF aims to match. This index comprehensively assesses the global, investment-grade, fixed-rate debt markets.

The index includes government, government agency, corporate and securitized non-U.S. investment-grade fixed-income investments, all of which were issued in currencies other than the dollar and had maturities longer than one year.

The expense ratio for the BNDX is 0.07%, making it somewhat more expensive than the BND.

The fund's market price currently sits at $47.08. This year, it has declined almost 14% as the macro-environment continues to impact bonds. Additionally, the market has been badly affected by the steady increase in bond yields brought on by increased interest rates.

With regard to net assets, the fund has a total of 78.94 billion, with Spain, France and Italy making up the majority of its holdings.

Future/forward, government and corporate bonds are the top three sectors on the BNDX. The BNDX maintains assets outside the United States; non-U.S. bonds account for 95.3% of its assets, which is how it differs from the BND. U.S. bonds make up 2.8% of the portfolio.

Why Invest in ETFs?

You can choose from multiple ETFs to invest in, which can reach across several different markets. For example, some investors may choose stock ETFs, while others may opt for bond ETFs. But the question remains, why invest in ETFs at all?

Diversification

ETFs offer access to a wide range of financial markets worldwide. Just one ETF can spread your risk across a group of equities, markets or styles. This kind of diversification is ideal for investors hoping to reduce the risk of an investment.

Trading Style

An investor can benefit not only from diversification but also from the liquidity of an ETF. As an ETF can be purchased on major stock exchanges, it trades similarly to a stock. Therefore, an ETF fund’s price is updated throughout the day and can be traded more conveniently than a mutual fund. Investors can watch the price chart and can trade through their phones.

Low Fees

No one wants to see high expenses when investing their money. As a result, many individuals choose to invest in ETFs because of their lower expense ratios. While mutual funds can have high expenses owing to management fees, service fees, paying a board of directors and load fees, ETFs are passively managed and can be a much cheaper alternative.

Pricing

As ETFs trade throughout the day based on their underlying securities, their price is unlikely to be overvalued or undervalued. ETFs trade based on supply and demand. Thus investors can benefit from reduced risk.

Tax

Since most ETFs are passively managed and track a certain index, they often do not have significant capital gains that must be distributed to shareholders. Therefore, investors have more control over taxes.

Considerations of ETF Investments

Although ETFs are a popular choice among investors, many risks and considerations must be pondered before investing. Disadvantages to ETF investments are listed below.

Intraday Pricing

For longer-term investors, constant price changes may come as a disadvantage. The higher liquidity may initially affect an investment and cause potential losses. Some investors may choose to steer clear and invest in a mutual fund.

Costs

Compared to a mutual fund, the costs of an ETF are much lower. However, comparing an ETF to an individual stock, costs can be significantly higher. Investing in stocks requires no management fee.

Lower Dividends

There are dividend-paying ETFs, but the yields tend to average at a lower level than individual stocks. Trading individual stocks mean an investor can pick the higher-yielding investment, whereas ETFs track a broader market that can lead to reduced dividends for an investor.

Stocks

ETFs as designed to follow a specific index, which can lead to over-diversification rather than investment in the best stocks. An alternative solution may be to buy a limited number of the best companies rather than an entire index.

Factors to Consider

Vanguard Bond ETFs, such as BND and BNDX, can be a good choice for investors looking to enter the bond market amid market uncertainty. These ETFs provide exposure to the U.S. and international bond markets respectively and are attractive options for long-term investors seeking fixed income with lower risk. They offer diversification, liquidity and lower fees compared to other investment options. However, investors should consider potential disadvantages such as intraday pricing and lower dividends before making investment decisions.

Compare Brokers for ETFs

Investors can pick from several ETFs through a brokerage account. With so many ETFs to choose from, it may be challenging to narrow down a broker that provides the ETF or ETFs you want to invest in. Below you can find the best brokers for ETFs.

Frequently Asked Questions

Q

Is a bond ETF a good idea?

A

Investors may want to consider bond ETFs, particularly if they intend to trade them regularly. Bond ETFs are another option for individuals wishing to retain their investments for a long time because they may accommodate a variety of demands.

Q

Are bond ETF better than bond funds?

A

Bond ETFs can be a better choice than bond funds. Bond ETFs can be more cost-efficient, liquid and transparent than bond funds. However, it is essential to do your own research and reach your own decision on which is better.

Q

How are ETFs taxed?

A

ETFs are subject to capital gains taxes when sold. The tax rate depends on the holding period, with short-term gains taxed at the ordinary income rate and long-term gains taxed at a lower rate. Dividends and interest earned from ETFs may also be subject to taxes. It is recommended to seek advice from a tax professional or financial adviser for a better understanding of the tax implications of investing in ETFs.

About Sam Boughedda, Stock Market Analyst

He is an expert in the following spaces: stock market news writing, analysis, and research.