Andrew Herdman

Vanguard Offers Four New Bond ETFs

Agree diversification is of less value in fixed income, but precious little alpha outperformance is evident, so it really comes down to costs. The annual expense of an ETF has to be offset by lower administration and transaction costs compared to individual direct investment in bonds. Given retail bid/offer spreads including commission on bonds are typically 30-40 basis points, bond ETF's with annual TERs of 10-20 basis points may well be a more cost effective option. Non-US investors do have to be careful not to be exposed to US withholding taxes. US bonds pay interest gross to foreign investors, but dividend income from a bond ETF may not enjoy the same exemption, suffering a 30% US dividend withholding tax.