Vanguard Offers Four New Bond ETFs

 |  Includes: BIV, BLV, BND, BSV
by: Richard Kang

Further to my posting back in January giving details of Vanguard’s low cost (they are kind of like the Walmart of the ETF industry, right?) fixed income ETFs, we got news yesterday of four new offerings:

Vanguard Total Bond Market ETF

Benchmark: Lehman Brothers Aggregate Bond Index
Holdings: 2,581
Expense Ratio: 0.11%

Vanguard Short-Term Bond ETF (NYSEARCA:BSV)

Lehman Brothers 1–5 Year Gov’t/Credit Index
Holdings: 710
Expense Ratio: 0.11%

Vanguard Intermediate-Term Bond ETF (NYSEARCA:BIV)

Benchmark: Lehman Brothers 5–10 Year Gov’t/Credit Index
Holdings: 850
Expense Ratio: 0.11%

Vanguard Long-Term Bond ETF (NYSEARCA:BLV)

Benchmark: Lehman Brothers Long Gov’t/Credit Index
Holdings: 668
Expense Ratio: 0.11%

There’s no doubt that the appeal for these new ETFs (well, for Vanguard in general) is the low cost. But my feelings on bond ETFs still lead me to believe that the diversification benefits of an indexed bond holding aren’t really that great, especially compared to that among equities within a broad equity index. If having minimal tracking error to a particular bond index really matters to you (then you are likely an institutional investor), then some form of index holding matters. But if you are an institution, you’re clearly not using an ETF or ETFs for your fixed income exposures … well I suppose you could be, but if your board of trustees knew this you should be cleaning up your resume.

Unless you’re a complete novice who can’t build a laddered bond portfolio (or acquire an advisor who can do this), then bond mutual funds or perhaps these bond ETFs should be one of your final options to gain fixed income exposure. It’s almost like the opposite as what might be done on the equity side where you might have a core group of ETFs with stock selection as a “satellite” strategy. For fixed income, a laddered bond portfolio could be the core and fixed income ETFs could be used as “satellite” positions. That might not make sense on a first read especially with regard to the use of bond ETFs. However, I think that we will see a breakthrough in this space where more actively managed fixed income ETF mandates appear as investors continue to push the limits to extract more yield from their portfolios in what is a tough, low-yield world.