BND is Vanguard’s Total Bond Market ETF, one of the most popular bond funds on the market. This BND review will highlight its strengths and weaknesses and conclude whether BND is still a great fund to buy for domestic bond exposure. So, what exactly is BND made up of and why is it so popular?
BND is comprised of 9,719 different corporate, municipal, and treasury bonds. Despite its large number of holdings, BND has an expense ratio of only 0.035%. The fund is composed mostly of AAA-rated bonds and has a compound annual growth rate (CAGR) of 4.31%.
In this BND review, I will take a closer look at Vanguard’s most renowned bond ETF. We will look at the fund’s composition in terms of credit quality and fixed income maturity and also go over some key facts and figures.
In the second half of this review, we’ll focus more on BND’s performance and analyze some potential risks as well.
FYI: The best way I've found to invest in ETFs is through M1 Finance. It's free and you even get an instant line of credit! Have a look here (link to M1 Finance).
BND Review – Overview
|Name||Vanguard Total Bond Market ETF|
|Index||Bloomberg Barclays U.S. Aggregate Float Adjusted Index|
The Bloomberg Barclays US Float Adjusted Index is tracked by the Vanguard Total Bond Market ETF (BND). This index covers only US bonds and excludes all international debt. In addition, only corporate, municipal, and treasury investment-grade bonds are included which do not extend to debentures from US agencies.
BND has a 0.035 percent expense ratio. Before Vanguard lowered it again at the beginning of last year, the expense ratio used to be 0.04 percent. With an expense ratio close to 0 BND provides more value and holdings diversity than most other bond funds.
BND is published by Vanguard. Vanguard is an excellent supplier of low-cost mutual and exchange-traded funds and is highly suited to us retail investors. But their funds are not only extremely cheap and tax-efficient, but the entire company is also set up to profit the most from individual investors.
NOTE: The easiest way to add diversification to your portfolio is to invest in real estate through Fundrise. You can become private real estate investor without the burden of property management! Check it out here (link to Fundrise).
BND Review – Fund Composition
Within the following section, we will look at BND’s composition. What’s the distribution of credit quality in the fund and how long until most of its holdings mature?
BND consists of the investment-grade debt AAA, AA, A and BBB. However, the largest share consists of 68 percent AAA-rated bonds. This is followed by 18% BBB-rated bonds and 11% A-rated bonds.
No non-investment grade bonds are not part of the fund. In terms of risk, BND relies predominantly on highly rated debt making possible less likely defaults.
The variation in the maturities of ETF bonds can play an important role in reducing interest rate risks. Longer maturity bonds are considerably more vulnerable to price-action-based interest rate movements.
BND holds bonds with maturities ranging from 1 to 30 + years. Make up by far the largest portion of BND at 32.5 percent with maturities of 20 to 30 years. The remaining 70 per cent is distributed between 1-10-year and 10-20-year maturities.
FYI: Another great way to get exposure to the real estate sector is by investing in real estate debt. Groundfloor offers fantastic short-term, high-yield bonds that can add diversification to your portfolio!
BND Review – Analysis
|Downside Deviation (monthly)||0.55%|
|US Market Correlation||0.07|
BND has 3.71 percent annual volatility (1.07 percent monthly). Bond fund volatility tends to be far less than the corresponding total stock market funds at all times. This makes sense since these fixed-income holdings are meant to stabilize portfolio growth or smooth the transition to retirement where there is little use for huge swings in portfolio value.
Over the years, BND experiences drawdowns of up to -4.0 percent. Major drawbacks occurred in 2008/2009, when the financial crisis hit the banks of the world and the U.S. in particular, again in 2013/2014 and the latest in 2017. The current stock market drawdown (2020) isn’t much reflected in either fund.
Certainly the statements about volatility and maximum drawdown are only true for the time period examined above. It would be foolish to say either the negative levels will never be higher or the volatility will never increase.
ALSO: Small-cap equities can add a lot of upside to a portfolio while mitigating risks. Recently, I've discovered Mainvest's investment platform which makes it easy to invest in small and local businesses with returns of 10-25%. Take a look here (link to Mainvest).
BND Review – Performance
Of course, performance and overall returns are the key indicators of every investor’s success in a fund. Since we’ve discussed many of the key composition facts above, now it’s going to be easier to see how these impact returns. The following is a $10,000 dollar backtest invested in BND early in 2008. The annual returns are:
BND was generating moderate positive returns for the most part. The fund was particularly profitable for 2019 and 2020. When insecurities about stock market performance are typically high, bond funds will profit. Also the profits usually correlate with a fall in interest rates.
|Portfolio||Initial Balance||Final Balance||CAGR|
By now, a $10,000 investment in BND would have brought about $17,000. This is equal to a 4.31 percent average growth rate. These returns are significantly lower than the average 7-8 percent compared to stocks, but bond funds shine in their ability to provide a fixed source of income. BND has certainly delivered on that promise with a CAGR of more than 4 percent.
BND vs. Other Funds
BND vs. TLT
TLT’s compound annual growth rate ( CAGR) of 7.87 percent is significantly higher than BND’s at just 4.19 percent in terms of performance. However, TLT is also much more volatile than BND at 3.72 percent with an annual volatility of 14.18 percent. This also leads TLT to experience much higher maximum drawdowns than BND.
While examining the differences between BND and TLT, it is important to bear in mind that the two funds have different objectives. And each of them fulfills its goal in specific ways.
BND is not aiming for maximum returns. It aims to achieve stability and a steady stream of investment revenue.
TLT does not aim to achieve stability. It aims to make long-term US Treasury Bond exposure easy and flexible for investors.
Both funds are doing a fantastic job of what they set out to do, in a way. TLT however outperforms BND by a large margin in total returns.
BND vs. BNDX
Overall, with a compound annual growth rate ( CAGR) of 4.57% vs. 4.16%, BNDX performs better than BND. Also, BNDX is less volatile than BND, and has lower drawdowns. Only U.S. bonds with mostly high credit ratings make up BND. BNDX consists of international bonds with different credit ratings, from AAA to BBB.
Both provide their target bond markets with excellent exposure, at very low fees. BND holds far higher rated bonds than BNDX in terms of the credit rating. In contrast, BNDX also yields higher returns in the time frame we’ve been testing.
The actual question here is not to be either-or, but how much. How much of your portfolio should you generally allocate to international exposure? That will mostly depend on how much you believe in the United States ‘ economic future.
It won’t be to your detriment to have a certain amount of your portfolio in a global bond Fund. But if that amount is 5 % , 10% or 20% is just a matter of personal taste.
BND vs. BIV
BND comprises U.S. bonds with maturities ranging from 1-30 + years. On the other hand, only between 3-15 years BIV is made up of bonds with maturities. Overall, with a compound annual growth rate ( CAGR) of 5.31 percent vs. 4.19 percent, BIV performs better than BND. But BIV is also more volatile than BND, as well as experiencing higher drawdowns.
BND and BIV provide excellent visibility to their target bond markets, at very low fees. As for credit rating, BND holds higher-rated bonds than BIV. But BIV also yields better returns in the time span that we were studying.
The BND vs. BIV question is not necessarily one that is better or worse than this. Rather it should depend on the investment objectives and the overall portfolio strategy. Due to its diversification and exposure to the entire stock market BND remains the bond fund of choice for a standard 3-fund portfolio.
However, for higher overall returns there is an argument to be made for including BIV and other more niche bond ETF. For the sake of simplicity, I would opt for BND. If you like deep diving, why not take a closer look at BIV?
BND vs. SCHZ
With a compound annual growth rate ( CAGR) or 3.33 percent compared to 3.32 percent, SCHZ has an overall higher return than BND. SCHZ is also less annually volatile and experienced a lower maximum drawdown over the last decade. In terms of composition, SCHZ is weighed at around 75 percent more towards AAA-rated bonds than BND, compared with 66 percent for BND.
Conclusively, two excellent bond ETFs are BND and SCHZ which perform almost identically. Whether you choose BND or SCHZ, it won’t affect your portfolio value much in the long run, nor your path toward financial freedom.
In fact, for simply choosing the fund that is more convenient for you to invest in, there’s a lot to say: so if you’re already with Charles Schwab then go with SCHZ, if you have a Vanguard account pick BND.
I would always choose the fund with the lower expense ratio (BND) and the company behind the fund set up to keep it that way, if in doubt!
BND vs. AGG
BND has an annual compound growth rate of 4.31%, while AGG has an annual compound growth rate of 4.37%. However, AGG is also more volatile than annualized BND 3.81 percent vs. 3.71 percent. This also results in a higher maximum drawdown for the periods tested in AGG. Although AGG has a slightly higher expense ratio of 0.04 percent, it manages to compensate for that deficiency and helps to overall perform BND.
In conclusion, both BND and AGG are excellent bond ETFs. The question of which one to choose is almost solely a matter of personal preference.
The only really significant differentiating factor is the expense ratio. Of course, in our backtest, AGG yielded slightly more and is slightly more volatile than BND, but not to a degree that you would notice in your portfolio balance.
I – personally – prefer to stick to a company that has proved time and time again that it is willing to put individual investors before profits: Vanguard. Moreover, we can surely count on Vanguard to be among the first to further reduce fees if at-cost operation so allows. BND is therefore a part of my portfolio.
Vanguard’s Total Bond ETF (BND) is still among the best in the industry. While other funds have come and gone and some have yielded higher returns than BND, none have achieved the same level of diversification through thousands of holdings.
And true full exposure to the entire U.S. bond market does not have to be pricey: just recently Vanguard reduced BND’s expense ratio down to 0.035%!
BND is well-diversified, inexpensive, and widely available. Plus, Vanguard will surely strive to reduce fees even further in the future. If you want exposure to bonds BND still remains the top pick.
Over the past years, I have discovered several tools and products that have helped me tremendously on my path to financial freedom:
P.S.: The links below are affiliate links, which means I receive a small commission at no extra cost to you when you sign up for one of the services. Thank you for your support!
1)Personal Capital is simply the best tool out there to track your net worth and plan for financial freedom. Just their retirement planner alone has become an invaluable tool to keep myself on track financially. Try it out, it's free!
2) Take a look at M1 Finance, my favorite broker. I love how easy it is to invest and maintain my portfolio with them. I can set up automatic transfers, rebalance my portfolio with one click and even borrow up to 35% of my assets at super low interest rates!
3) Fundrise is by far the best way I've found to invest in Real Estate. You can diversify your portfolio by investing in their eREITs or even allocate capital to individual properties (without the hassle of managing tenants!).
4) Groundfloor is another great way to get exposure to the real estate sector by investing in short-term, high-yield real estate debt. Current returns are >10% and you can get started with just $10.
5) If you are interested in startup investing, check out Mainvest. I've started allocating a small amount of assets to invest in and support small businesses. Return targets are between 10-25% and you can start with just $100!
To see all of my most up-to-date recommendations, check out the Recommended Tools section.