Need Core Bond Exposure? Here Are Passive & Active Options

Investors looking for core bond exposure typically have two pathways when it comes to ETFs. One is passive options that track an index. The other is active options that leverage the capabilities of portfolio managers. Vanguard has options that can cater to both, depending on investor needs.

Passive Alternatives

All-encompassing bond exposure is typically available in indexed funds with low expense ratios. Case in point — the Vanguard Total Bond Market Index Fund ETF Shares (BND) with its low expense ratio of three basis points. The fund tracks the Bloomberg Barclays U.S. Aggregate Float Adjusted Index, giving investors umbrella-like exposure to investment-grade debt within the U.S. Because of this, the fund could be used as a standalone product for an investor’s whole core bond portfolio in the convenience of an ETF wrapper.

Because BND is tethered to an index, it will be exposed to the largest debt issuers. In this case, it’s the U.S. government. Therefore, benchmark Treasuries will be the majority of the fund’s exposure. Those looking for more diversification or a fund with flexibility in a rate-cutting environment may want to consider the active alternative.

“I’m definitely not against fixed-income indexing at all, but you certainly want it to be cheap, and you want to recognize that you’re not going to have the breadth of market that you might get by being more active,” said Eric Jacobson, Morningstar’s senior principal for fixed-income strategies. “And you also want to recognize that because of the way the bond market has evolved since the financial crisis in the last several years, you may be taking on more interest rate risk than you thought you were, because, say, five, 10 years ago, the bond market was probably a little bit less rate-sensitive than it is today.”

Another option is the newly launched Vanguard Core-Plus Bond Index ETF (BNDP). BNDP tracks the Bloomberg U.S. Universal Float Adjusted Index that includes U.S. government and investment-grade corporate, but adds securitized, high yield corporate, and emerging market debt. It offers investors core bond exposure with an added focus on extracting more yield.

The Active Alternative

For active core exposure, consider the Vanguard Core-Plus Bond ETF (VPLS). The fund’s active management allows its portfolio managers to not only identify income opportunities, but to respond to changing market conditions. This makes VPLS an all-weather solution in any economic landscape.

VPLS maintains exposure to U.S. Treasuries, but digs deeper into the fixed income opportunity set for additional yield. VPLS also adds exposure to mortgage-backed, and corporate securities, and emerging markets debt of varying yields, maturities, and credit qualities to extract more yield.

Furthermore, active ETFs are backed by the expertise and experience of the Vanguard Fixed Income Group. Given the current macroeconomic conditions, an active fund like VPLS helps advisors and investors navigate the murky macro environment.