BND vs. BNDX

BND vs. BNDX – Which Bond ETF Is Better?

Bond funds play an important role in a well-diversified portfolio. They hedge the volatility of stocks and provide stability as your portfolio grows more mature. Vanguard offers fantastic bond ETFs. But what’s actually the difference between BND vs. BNDX? And which of these ETFs is better?

Overall, BNDX performs better than BND with a compound annual growth rate (CAGR) of 4.57% vs. 4.16%. BNDX is also less volatile than BND and experiences lower drawdowns. BND is made up only of U.S. bonds with mostly high credit ratings. BNDX is made up of international bonds with various credit ratings ranging from AAA to BBB.

BND vs. BNDX – Overview

This article will examine the differences between BND and BNDX in terms of their composition and performance. We will look at the fund composition such as credit quality and maturity distribution, as well as some risk-related metrics.

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

What’s The Difference?

BNDBNDX
NameVanguard Total Bond Market ETFVanguard Total International Bond ETF
IndexBarclays Capital U.S. Aggregate Bond IndexBarclays Global Aggregate Bond Index
Expense Ratio0.035%0.08%
IssuerVanguardVanguard
StructureETFETF
Inception Date4/10/20074/6/2013
AUM$53.8B$27.1B
Holdings9,3986,175

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 Total International Bond ETF (BNDX) tracks the Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged). This index gives investors exposure to the global bond market and is comprised of bonds from various countries and credit ratings.

This ETF provides an excellent and passive way for investors to apply additional international diversification to their portfolio. The fund also implements a hedging strategy to mitigate currency exchange rate risks.

Expense Ratio

BND has an expense ratio of 0.035%. Compared to any other ETF on the market with an average expense ratio of 0.28%, BND has indeed very low fees. Just recently, in early 2020, Vanguard lowered the expense ratio yet again from 0.04% to 0.035%.

BNDX has an expense ratio of 0.08%. This is nearly triple that of BND. So, the question is: with BNDX being almost three times more expensive than BND, is it worth it? We’ll answer this question later on when exploring how the difference in fees impacts returns.

In plain numbers, this means 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 $8 per year in fees.

Issuer

BND and BNDX are issued by Vanguard. Vanguard has long been my favorite asset management company to invest with. Not only do they provide excellent investment products at a low cost, but they have also built their entire company on Jack Bogle’s philosophy to put investors first.

Number of Holdings

BND holds 9,398 bonds. It does so to give investors exposure to a very broad bond market ranging from short- to long-term bonds and distributed among the corporate, municipal, and federal sectors.

BNDX holds 6,175 bonds. It might seem odd at first that BNDX holds fewer bonds than BND even though it is more diversified internationally, but the reason becomes obvious when we consider the objective of each fund.

While BND aims to give investors exposure to the entire stock market, BNDX simply aims for diversification through international exposure.

BND vs. BNDX – Fund Composition

In this section, we’ll take a look at the differences in composition between BND vs. BNDX. Specifically, we’ll examine the distribution of credit quality and bond maturity in both funds.

Credit Quality

BND – Credit Quality

BND is composed of AAA, AA, A, and BBB investment-grade bonds. Non-investment grade bonds are excluded from the fund. By far the largest portion is made up of AAA bonds at 67.6%, followed by BBB grade bonds at 17.6% and A bonds at 11.4%. The remaining bonds are AA grade.

This is based on Standard & Poor’s rating system, although S&P’s and Moody’s ratings don’t really differ significantly.

In terms of risk, BND is set up very well. With over two-thirds of all bonds having the highest possible risk rating: AAA.

BNDX - Credit Quality
BNDX – Credit Quality

BNDX is composed of bonds of mixed credit ratings. The ratings range from AAA to BBB and are about evenly distributed with every rating category making up roughly one-quarter of the total fund.

The largest share is made up of BBB rated bonds at 28.1% followed by AA rated bonds at 26.2% and A-rated bonds at 25.7%. This leaves AAA-rated bonds at 19.9%. Contrary to BND, AAA-rated bonds make up the smallest portion of assets in BNDX.

BNDX - Market Allocation by Country
BNDX – Market Allocation by Country

If we look at the countries from which these bonds are coming from you will find Japan on top of the list at almost one-fifth of the fund’s bonds.

This is followed in descending order by France, Germany, the United Kingdom, and Italy.

Maturity

The variance in maturities in bond ETFs can play a major role in mitigating interest rate risks. Longer-term bonds are far more susceptible to interest rate changes on a price-action level. In terms of plain yields, however, long-term bonds outperform short-term bonds.

BND - Fixed Income Maturity
BND – Fixed Income Maturity

BND holds bonds varying in maturity from 1 to 30+ years. But the largest portion by far is made up of bonds with a maturity of 20-30 years. The second-largest section is made up of bonds with a maturity of somewhere between 1-10 years.

Naturally, as longer-term bonds generally provide higher returns it seems prudent to allocate a decent amount of your assets to these types of bonds.

BNDX - Fixed Income Maturity
BNDX – Fixed Income Maturity

BNDX holds bonds with varying maturities. The biggest portion here is made of much shorter-term bonds ranging from 1-3 years while long-term bonds of 20+ years only make up around 15% of the entire holdings.

BNDX is aiming for a far more diversified approach here than BND which falls right in line with their investment objectives: exposure to the entire bond market and maximized returns vs. diversification.

BND vs. BNDX – Analysis

MetricBNDBNDX
Volatility (monthly)0.97%0.88%
Volatility (annualized)3.37%3.04%
Downside Deviation (monthly)0.49%0.48%
Max. Drawdown-3.68%-3.03%
US Market Correlation0.040.17
BND vs. BNDX – Risk Metrics

Volatility

BND has an annual volatility of 3.37% (0.97% monthly). Compared to most other ETFs or even the entire stock market this is extremely low! The entire U.S. stock market experiences yearly volatile swings somewhere between 4-5%. Thus, BND presents a good option for investors to stabilize their portfolio.

BNDX has an annual volatility of 3.04% (0.88% monthly). This is even a few percentage points lower than BND’s volatility. It appears that exposure to a wide range of bonds from different countries mitigates volatility even more.

BND’s increased volatility mostly stems from the fact that the Federal Reserve has chosen a rather active role in managing interest rates over the past decade. Other countries’ central banks are much more passive. Furthermore, the increased diversification smoothes changes in national interest rate policy.

Drawdown

BND vs. BNDX - Drawdowns
BND vs. BNDX – Drawdowns

The chart above shows the drawdowns for BND and BNDX each year since the earliest inception date in 2014. The differences are quite remarkable.

BND experiences drawdowns up to -4.0% throughout the years. It’s worst drawdown occurred in 2017 and some other less significant drawdowns in 2015 and 2018/2019. These drawdowns correlate with interest rate increases in the United States.

Federal Funds Rate

BNDX’s drawdowns seemed to have been capped at around -3.0% over the past few years. However, the fund has regularly reached that point throughout the year, for instance in 2015, 2017 most recently in 2020.

Interestingly, the most recession economic downturn has affect BND much less than BNDX.

BND vs. BNDX – Performance

As with all ETF comparisons, I’ll end this one by comparing the funds’ returns over the past years and backtesting a portfolio of $10,000. The below graphs show the cumulative return for each or period. This includes the reinvestment of any dividends payouts.

Annual Returns

BND vs. BNDX - Annual Returns
BND vs. BNDX – Annual Returns

Above you’ll see a chart of the annual returns from 2014 to 2020.

For the most part, BND has had modest positive returns. Especially, the last two years have been advantageous for the domestic bond market. There has been only one year among the last 6 when BND has yielded a negative return. This was in 2018.

BNDX also sees similar positive returns. But in many instances outperforms BND. Such was the case in 2014 and 2016 when BNDX achieved nearly double the return that BND did. Most recently, however, BND has been catching up by outperforming BNDX in 2020 and 2019.

Yields for both funds remain fairly steady. The differentiating factor here is the market price movement which is heavily influenced by base interest rates.

Portfolio Growth

BND vs. BNDX - Portfolio Growth
BND vs. BNDX – Portfolio Growth
PortfolioInitial BalanceFinal BalanceCAGR
BND$10,000$12,985 4.16% 
BNDX$10,000$13,320 4.57% 
BND vs. BNDX – Portfolio Final Balance

The graph above illustrates a portfolio backtest of $10,000 starting in 2014. All earnings are reinvested completely and no further contributions have been made.

$10,000 invested in BND would have resulted in $12,985 by now. This equates to a compound annual growth rate of 4.16%. Compared to the average return of the entire stock market at around 7.5% a bond fund will of course lag behind. On the other hand, you’ll have a more stable source of passive income with less volatility.

A $10,000 BNDX portfolio would have resulted in $13,320. This is equal to a CAGR of 4.57%. Over the past years, BNDX has yielded higher returns than BND.

If this trend continues only time will tell. It will depend to a large degree of the interest rate policy of the Federal Reserves and other central banks around the world. However, a little more diversification never seems like a bad idea!

Conclusion

BND and BNDX are the two most popular bond ETFs on the market, and for good reasons.

Both provide excellent exposure to their target bond markets at very low fees. In terms of credit rating, BND holds far more higher rated bonds than BNDX. Conversely, BNDX also yields higher returns in the time frame we have tested.

The real question here should not be either-or, but rather how much. How much of your portfolio should you allocate to international exposure in general? This will depend mostly on how much you believe in the economic future of the United States.

Having a certain amount of your portfolio in a global bond fund will not be to your detriment. But if that amount is 5%, 10% or 20% is simply a matter of personal taste.

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