Vanguard Bond Funds to Avoid for Higher Rates: Vanguard Total Bond Market Index (VBMFX)
Minimum Initial Investment: $3,000
Fans of Vanguard funds may consider it a sin to hold bond funds other than Vanguard Total Bond Market Index (MUTF:VBMFX), but the onset of rising interest rates is a time to consider alternatives.
While VBMFX, the largest bond fund in the world, is not the worst bond fund to hold when interest rates are rising, it’s far from the best. What’s good about VBMFX is that the fund is diversified across all maturities, from short- to intermediate- to long-term bonds. However, 70% of the holdings are government securities, which tend to get hit harder than corporate issues when interest rates are rising.
For example, year-to-date, VBMFX does have a decent gain of 3.1%; however VBIIX, a comparable Vanguard index bond fund that holds less government bonds than VBMFX, is up 4% YTD. That trend of underperformance is likely to continue for VBMFX as long as interest rates are rising.