BND vs. BIV

BND vs. BIV – What’s The Difference?

The role of bond ETFs in a diversified portfolio is to provide stability and to protect the investor from overexposure to stocks. BND and BIV are two excellent bond funds that can accomplish that very goal. But which of these funds actually performs better? And what’s the difference between BND and BIV?

BND is made up of U.S. bonds with maturities between 1-30+ years. On the other hand, BIV is made up of bonds with maturities only between 3-15 years. Overall, BIV performs better than BND with a compound annual growth rate (CAGR) of 5.31% % vs. 4.19%. However, BIV is also more volatile than BND and experiences higher drawdowns.

BND vs. BIV – Overview

In this article, we’ll discuss the differences in structure and efficiency between the BND and BIV. We’ll look at the composition of the fund as well as some risk-related metrics, such as credit quality and maturity distribution.

In the final part, we’ll compare both funds’ historical output through a $10,000 portfolio backtest.

What’s The Difference?

BNDBIV
NameVanguard Total Bond Market ETFVanguard Intermediate-Term Bond ETF
IndexBarclays Capital U.S. Aggregate Bond IndexBarclays U.S. 5
Expense Ratio0.035%0.05%
IssuerVanguardVanguard
StructureETFETF
Inception Date4/10/20074/10/2007
AUM$55.8B$12.9B
Holdings9,3982,040
BND vs. BIV – Differences

Index

The Vanguard Total Bond Market ETF (BND) tracks the Barclays Capital U.S. Aggregate Bond Index. This index includes only U.S. bonds with an investment-grade credit rating (BBB and above). Inflation-protected bonds (TIPS) or any kind of tax-exempt bonds are included in this index.

The Vanguard Intermediate-Term Bond ETF (BIV) tracks the Barclays U.S. 5 index. This index also includes investment-grade U.S. bonds but only with intermediate maturities of 3-15 years. Likewise, there are no tax-exempt bonds included here.

Thus, the only real concerning difference here is the exposure to different maturities.

Expense Ratio

BND has an expense ratio of 0.035%. BND currently has very low fees relative to any other ETF on the market with an average cost ratio of 0.28 percent. Recently, at the beginning of 2020, Vanguard again lowered the expenditure ratio from 0.04% to 0.035%.

BIV has an expense ratio of 0.05%. That’s almost double BND’s. So, the question is: is it worth it, since BIV is nearly three times more expensive than BND? We will answer this question later when exploring how the impact of the difference in fees is returning.

This implies, in plain numbers, that a $10,000 investment in BND would cost you around $3.5 in fees per year while the same investment in BNDX would result in fees of $5 per year.

Issuer

Vanguard Issues BND and BIV. For a long time, Vanguard has been my favorite investment firm in wealth management. Not only can they offer outstanding investment products at a low cost, but they’ve also based their whole business around the principle of Jack Bogle to put investors first.

Number of Holdings

BND holds 9,398 bonds. This does this to introduce investors to a very wide bond market that ranges from short- to long-term bonds and is spread throughout the business, regional, and federal sectors.

BIV holds 2,040 bonds. Since BIV aims to give investors exposure to a smaller section of the market it makes sense that the total number of bond holdings is lower. This becomes especially apparent when looking at the bond market as a whole: almost one-third of all bonds issued have maturities of 20-30 years.

While BND is aiming to expose investors to the entire stock market, BIV is simply aiming for a more niche exposure to intermediate-term bonds.

BND vs. BIV – Fund Composition

Within this section, we’ll look at the compositional variations between BND vs. BIV. We will look directly at the distribution of credit quality and maturity of bonds in both funds.

Credit Quality

BND – Credit Quality

BND is made of investment-grade AAA, AA, A, and BBB bonds. Non-investment grade bonds are not included in the fund. By far the largest share consists of 67.6 percent AAA bonds followed by 17.6 percent BBB grade bonds and 11.4 percent A bonds. The remainder of the bonds is category AA. 

It is based on the rating methodology of Standard & Poor since the ratings of S&P and Moody are not very substantially different.

BND is set up very well, in terms of risk. With more than two thirds of all bonds carrying the highest risk ranking possible: AAA.

BIV - Credit Quality
BIV – Credit Quality

BIV is composed of bonds of mixed credit ratings. However, AAA-rated bonds still make up a majority of bonds at 56.1%. AA-rated bonds, on the other hand, are basically non-existent in BIV.

The largest share is made up of BBB rated bonds at 24.7% followed by A-rated bonds at 16.2%. This leaves AAA-rated bonds at more than half. Contrary to BND, AAA-rated bonds make up a somewhat smaller portion of BIV’s total holdings.

Maturity

The variance in maturities in ETF bonds can play a significant role in mitigating interest rate risks. Longer-term bonds on a price-action basis are much more prone to interest rate shifts. Long-term bonds however outperform short-term bonds in terms of simple yields.

BND - Fixed Income Maturity
BND – Fixed Income Maturity

BND holds bonds with maturity varying between 1 and 30 + years. Yet by far, the largest portion is made up of 20-30-year maturing bonds. The second-largest section consists of bonds with somewhere between 1-10 years of maturity.

Since long-term bonds usually offer higher returns, of course, it seems wise to devote a reasonable amount of your assets to these types of bonds.

BIV - Fixed Income Maturities
BIV – Fixed Income Maturities

BNDX holds bonds with intermediate maturities. The biggest portion here is made of intermediate-term bonds ranging from 5-10 years while long-term bonds of 10+ years and short-term bonds of <5 years are basically non-existent.

BND is aiming for a far more diversified approach here than BIV which falls right in line with its investment objectives: exposure to the entire bond. Whereas, BIV sacrifices some diversification for a more concentrated bond exposure and potentially higher returns.

BND vs. BIV – Analysis

MetricBNDBIV
Volatility (monthly)1.07%1.53%
Volatility (annualized)3.72%5.30%
Downside Deviation (monthly)0.56%0.83%
Max. Drawdown-4.01%-8.65%
US Market Correlation0.060.05
BND vs. BIV – Risk Metrics

Volatility

BND has an annual volatility of 3.37% (0.97% monthly). This is incredibly small compared with most other ETFs, or even the entire stock market! The entire U.S. stock market is experiencing annual volatility swings between 4-5%. Thus, BND offers a strong option to balance its portfolio for investors.

BIV has an annual volatility of 5.30% (1.53% monthly). This is significantly higher than BND’s volatility and is one of the first metrics where we see the difference in fund composition between BND and BIV affect other metrics.

BIV’s increased volatility simply is due to the fact that the ETF is less diversified. BND’s varying maturities help it effectively balance the ups and downs of interest rate hikes and declines with shorter and longer-term bonds.

Drawdown

BND vs. BIV - Drawdowns
BND vs. BIV – Drawdowns

For every year after the earliest start date in 2008, the chart above indicates the drawdowns for BND and BIV. The variations are very interesting.

BND experiences drawdowns up to -4.0% throughout the years. The biggest drawdown happened in 2017 and some other less severe drawdowns occurred in 2015 and 2018/2019. Such drawdowns correspond with US interest rate hikes.

Federal Funds Rate

BIV experienced drawdowns close to -10% during the same period. Its increased volatility also is reflected in the maximum drawdowns over the years. Because of its lower diversification, it is more heavily affected by the Federal Funds Rate as depicted above.

The above statement is true for the entire period of 2008 until 2020. There has never been a year where BIV did not experience a higher drawdown than BND.

BND vs. BIV – Performance

As with all ETF comparisons, I will conclude this one by comparing the returns of the funds over the past few years and backtesting a $10,000 portfolio. The graphs below display the average return for each time cycle. This includes any income payouts being reinvested.

Annual Returns

BND vs. BIV - Annual Returns
BND vs. BIV – Annual Returns

Above you’ll see a chart of the annual returns from 2008 to 2020.

BND produced moderate positive returns for the most part. Especially for the domestic bond market the last two years have been advantageous. In the last 6 years there was just one year when BND yielded a negative return. This was in the year 2018.

BIV sees even higher positive returns. And in many instances outperforms BND. Such is the case in every year except 2013 and 2018. The years were both funds showed a negative year-end return BIV performed significantly worse than BND.

It looks like BIV will outperform BND in times of economic growth but might have a slight disadvantage when the economy is stagnant or even declining. However, so far the total returns below speak for themselves.

Portfolio Growth

BND vs. BIV - Portfolio Growth
BND vs. BIV – Portfolio Growth
PortfolioInitial BalanceFinal BalanceCAGR
BND$10,000$16,645 4.19% 
BIV$10,000$19,002 5.31% 
BND vs. BIV – Portfolio Backtest

The following graph shows a $10,000 portfolio backtest commencing in 2008. All profits are fully reinvested, and no additional contributions were made.

A $10,000 investment in BND would have resulted in $16,645 by now. This is equivalent to an average compound growth rate of 4.19%. Of course, a bond fund will lag behind compared to the average return of the entire stock market at around 7.5 percent. On the other hand, with less uncertainty, you’ll have a more reliable source of passive income.

A $10,000 investment in BIV would have resulted in $19,002. This is equal to a CAGR of 5.31%. In terms of raw numbers, BIV is much better than BND. An annual return of 5%+ comes even close to that of stocks alone.

As highlighted above this trend seems likely to continue as long as economic growth is strong. As a hedge against stocks and economic decline BND perhaps might be suited. It entirely depends on what you expect from your bond funds in your ETF portfolio.

Conclusion

BND and BIV are, for good reason, two of the most common bond ETFs on the market.

All provide their target bond markets with excellent visibility, at very low fees. As regards credit rating, BND holds more high-rated bonds than BIV. However, BIV also yields better returns in the time span we’ve been studying.

The question of BND vs. BIV is not necessarily one of which is better or worse. It should rather depend on the investment goals and overall portfolio strategy. For a standard 3-fund-portfolio BND still remains the bond fund of choice, thanks to its diversification and exposure to the entire stock market.

However, there is an argument to be made to include BIV and other more niche bond ETF for higher overall returns. For simplicity’s sake, I’d choose BND. If you like to dive deep, why not give BIV a closer look?

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