Vanguard’s growth in the exchange traded funds (ETFs) universe is continuing at an unbridled pace. The Pennsylvania-based index fund giant is the second-largest U.S. ETF issuer with $526.5 billion in ETF assets under management as of June 30.
In May, Vanguard was the top asset gather among ETF issuers with $8 billion of inflows, more than quadruple the amount hauled in by the second-place issuer for that month.
It’s no secret why investors love Vanguard ETFs: Search the term “average ETF expense ratio” and you’ll find a few different answers, but they are all in the neighborhood of 0.45% per year, or $45 per $10,000 invested.
That’s not too shabby, particularly when measured against actively managed mutual funds, but many Vanguard ETFs charge barely more than $10 a year per $10,000 invested. Some its ETFs are even cheaper than that.
Good news for income investors: The low costs on Vanguard ETFs are not limited to the firm’s equity-based products. Buoyed by the combination of low costs and investors’ seemingly unquenchable thirst for fixed-income assets this year, some its bond ETFs are growing, too.
Here are few of the hidden gems of the Vanguard ETF bond stable.
Vanguard ETFs for Cheap Income: Vanguard Emerging Markets Government Bond ETF (VWOB)
Expense Ratio: 0.34%, or $34 for every $10,000 invested.
The Vanguard Emerging Markets Government Bond ETF (NASDAQ: VWOB) is less expensive than 70% of rival funds, according to the issuer. But there is more to VWOB’s story.
Year-to-date, VWOB is up nearly 8.5% and it currently resides near all-time highs. While many investors are using the Federal Reserve’s ongoing refusal to raise interest rates this year as an opportunity to feast on rate-sensitive U.S. government and high-yield corporate bond ETFs, others are flocking to emerging markets debt ETFs such as VWOB.
There are good reasons to consider a Vanguard ETF like VWOB. Emerging markets bonds denominated in U.S. dollars, such as the nearly 900 bonds held by VWOB, are predictably sensitive to fluctuations in the U.S. currency. The stronger the dollar, the more investors are likely to eschew dollar-denominated emerging markets bonds because a sturdy greenback implies greater external financing needs for issuers of developing world debt.
Fortunately, the Fed’s lower for longer policy is pushing the dollar down this year. Further increasing the allure of this Vanguard ETF is the fact that yields on Brazilian and Russian sovereign have recently plummeted, meaning prices on those bonds are rising.
Those countries combine for over 15% of VWOB’s weight.
Vanguard ETFs for Cheap Income: Vanguard Tax-Exempt Bond ETF (VTEB)
Expense Ratio: 0.12% per year
The Vanguard Tax-Exempt Bond ETF (NYSEARCA:VTEB) is one of the newest Vanguard ETFs, having debuted in August 2015.
This Vanguard ETF tracks the Vanguard Tax-Exempt Bond ETF, which “seeks to offer diversified exposure to the national municipal bond market, representing bonds with maturities across the yield curve and an effective duration between 5 and 8 years. The index reflects a higher-quality, investment-grade universe that focuses on the more liquid portion of the market,” according to Vanguard.
To be precise, VTEB’s average duration is 5.4 years, putting this Vanguard ETF firmly in the middle duration space. VTEB holds nearly 1,400 municipal bonds, 82% of which are rated AAA or AA.
Now home to roughly $371 million in assets under management, VTEB is one of the most successful ETFs to debut over the last 12 months, and frugal fixed-income investors are sure to enjoy the fact that VTEB’s 0.12% expense ratio means this Vanguard ETF is less expensive than 86% of rival funds.
Vanguard ETFs for Cheap Income: Vanguard Extended Duration Treasury ETF (EDV)
Expense Ratio: 0.10% per year
The Vanguard Extended Duration Treasury ETF (NYSEARCA:EDV) is an excellent ETF for investors betting the Fed is not going to raise interest rates anytime soon … or ever again. That last part is only slight hyperbole because of the bonds that EDV holds.
This Vanguard ETF follows the Barclays U.S. Treasury STRIPS 20–30 Year Equal Par Bond Index and has an average duration of 25 years, implying hypersensitivity to changes in interest rates. Separate trading of registered interest and principal securities (STRIPS), are bonds that sell at discounts to par value, meaning there are no interest payments.
According to TreasuryDirect.gov, “a Treasury note with 10 years remaining to maturity consists of a single principal payment, due at maturity, and 20 interest payments, one every six months over a 10 year duration. When this note is converted to STRIPS form, each of the 20 interest payments and the principal payment becomes a separate security.”
Bottom line: While cost-effective, EDV is a Vanguard ETF that is highly sensitive to changes in interest rates, meaning that if the Fed reverses course, this ETF could be punished.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.
