Vanguard has roughly $740 billion in assets under management across its exchange-traded funds, making Vanguard ETFs the second biggest player in the U.S.
By any metric, that is impressive, but Vanguard’s jaw-dropping AUM tally is all the more impressive when considering the company’s ETF lineup is comparatively small relative to rivals such as iShares and State Street.
While many investors know Vanguard for its low-cost equity ETFs and index funds, the firm is also one of the largest providers of fixed income-funds. The Vanguard Total Bond Market ETF (NYSEARCA:BND) is one of the largest bond ETFs in the U.S., and several Vanguard bond ETFs have a considerable following as well, including the $22 billion Vanguard Short-Term Bond ETF (NYSEARCA:BSV).
Still, a few quality Vanguard bond ETFs remain thin on spotlight, and that’s unfortunate, because these acute fixed-income plays deserve some acclaim of their own. If you’re looking for Vanguard’s well-known mix of low fees and strong performance while honing in on specific corners of the bond space, these funds will get the job done.
Unheralded Vanguard Bond ETFs: Vanguard Long-Term Corporate (VCLT)
Expenses: 0.07%, or $7 annually on every $10,000 invested
SEC Yield: 4.2%
The Federal Reserve recently raised interest rates for the second time this year, and many bond market observers believe another rate hike is coming before the end of 2017. However, yields on U.S. government debt are still low, indicating that many fixed-income investors are compelled to consider other parts of the bond market.
The Vanguard Long-Term Corporate Bond ETF (NASDAQ:VCLT) gives investors a cost-effective avenue to a broad basket of high-grade corporate bond ETFs. With an expense ratio of just 0.07% annually, VCLT is less expensive than 87% of rival funds. And considering that a combined 88% of its 1,700-plus holdings are rated A or Baa, VCLT fits the bill as a conservative bond ETF.
Meanwhile, VCLT yields almost 4.2%, well above what investors earn on U.S. Treasuries.
While credit risk is not an issue with this Vanguard ETF, investors should note the fund’s duration of 14.1 years. Duration measures a bond’s sensitivity to interest rate changes, meaning VCLT can be sensitive to such moves. On that note, this Vanguard bond ETF has actually traded modestly higher since the Fed’s most recent rate hike.
Unheralded Vanguard Bond ETFs: Vanguard Tax-Exempt Bond ETF (VTEB)
SEC Yield: 1.9%
The Vanguard Tax-Exempt Bond ETF (NYSEARCA:VTEB) debuted less than two years ago, meaning this is one of the newest Vanguard bond ETFs. VTEB is Vanguard’s first foray into municipal bond ETFs, though the firm already had a major footprint in the world of municipal bond index and actively managed funds.
As is the case with so many Vanguard ETFs, VTEB has garnered a loyal following among investors since coming to market. Assets under management of $1.2 billion confirm as much. This Vanguard bond ETF also features a massive lineup with almost 3,170 issues, 93% of which are rated AAA, AA or A.
VTEB’s average duration is 5.8 years, which is not as risky as long-term bond ETFs. Longer-term risks for this Vanguard bond ETF and other municipal bond funds include potential changes to the U.S. tax code that could reduce the tax benefits of munis and deteriorating municipal balance sheets in states that are major issuers of these bonds, such as California and Illinois.
While the headline yield on VTEB is 1.9%, the tax-equivalent yield — remember, munis are exempt from federal taxes — for the highest tax bracket is a hair above 3.1%.
Unheralded Vanguard Bond ETFs: Vanguard Emerging Markets Government Bond ETF (VWOB)
SEC Yield: 4.2%
With U.S. Treasury yields still low and trillions of dollars of developed market bonds still sporting negative yields, it is not surprising that income-starved investors are turning to more exotic fare.
That includes emerging-markets bonds.
The Vanguard Emerging Markets Government Bond ETF (NASDAQ:VWOB), which yields almost 4.6%, holds nearly 1,000 bonds and has nearly $1 billion in assets under management. China is the ETF’s largest geographic weight at 15.5%. While the 8% allocation to Mexico is somewhat problematic given that country’s recent penchant for raising interest rates, the rate trajectory in Brazil, Indonesia and Russia is lower. Those three countries combine for over 17% of VWOB’s weight.
This Vanguard bond ETF is also a play on a weaker dollar. VWOB’s holdings are dollar-denominated, so when the dollar is strong, emerging markets bond issuers external debt issues come under scrutiny. Fortunately, the dollar has been a dud among major currencies.
Fifty-four percent of VWOB’s holdings are rated A or Baa, according to Vanguard data.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.