Bonds are an important part of any ETF portfolio. The mitigate the risk and volatility of stocks and provide further diversification. That said, there’s a nearly endless array of bond ETFs available on the market, so how do you pick the right one?
BND and TLT are two of the trusted ones, but which of these is actually better? I have spent hours comparing every single detail of these two funds and here is what I found:
In terms of performance, TLT’s compound annual growth rate (CAGR) of 7.87% is significantly higher than BND’s at only 4.19%. However, with an annual volatility of 14.18% TLT is also a lot more volatile than BND at 3.72%. This also leads TLT to experience much higher maximum drawdowns than BND.
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BND vs. TLT – Overview
In this post, we will take a closer look at the exact differences between BND and TLT regarding their composition and makeup. We’ll also assess some risk metrics such as volatility and drawdowns and conclude by comparing annual returns and overall performance of both bond funds.
Let’s get right to it!
What’s The Difference?
|Name||Vanguard Total Bond Market ETF||iShares 20+ Year Treasury Bond ETF|
|Index||Barclays Capital U.S. Aggregate Bond Index||Barclays Capital U.S. 20+ Year Treasury Bond Index|
The Vanguard Total Bond Market ETF (BND) tracks the Barclays Capital U.S. Aggregate Bond Index. This index gives investors exposure to a broad spectrum of taxable investment-grade corporate and treasury bonds.
It does not include tax-exempt or inflation-protected bonds (TIPS). All in all this index is geared towards investors looking for less price volatility and stabler investment income.
The iShares 20+ Year Treasury Bond ETF (TLT) tracks the Barclays Capital U.S. 20+ Year Treasury Bond Index which is comprised of 20-30 U.S. Treasury Bonds – as the name suggest.
It is an excellent way to increase your exposure to treasury bonds while also maintaining the flexibility of your portfolio thanks to its exchange-traded fund structure.
BND has an expense ratio of 0.035%. This is considered one of the lowest percentages in the entire ETF industry; the average is around 0.28%. Thus, BND can compete with the likes of VTI and VOO in terms of fees.
TLT has an expense ratio of 0.15%. This is almost five times higher than that of BND. Although it’s still below the industry average, this difference can have a significant impact on your portfolio’s returns.
Specifically, this means that an investment of $10,000 in either fund you would pay around $3.5 per year for BND and $15 per year for TLT in fees.
BND is 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.
TLT is issued by iShares. iShares – and the parent company BlackRock – are the world’s biggest issuers of exchange-traded funds. While they certainly present a solid choice and offer a wide range of financial products, they cannot compete with Vanguard on philosophy or costs.
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.
TLT holds 44 treasury bonds. Since TLT’s only goal is to hold 20+ year treasury bonds there is no great need nor availability for further diversification. If the U.S. government goes bankrupt, so will TLT. If it doesn’t, then why diversify?
BND vs. TLT – Fund Composition
In this section, we’ll take a look at the differences in composition between BND vs. TLT. Specifically, we’ll examine the distribution of credit quality and bond maturity in both funds.
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 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.
TLT is composed entirely of AAA investment-grade bonds: Treasury bonds.
Although it might be debatable whether the U.S. government could be graded AAA if it was a company given its massive amount of debt.
Now we’ll have a look at the difference in maturity between BND and TLT. This can play a crucial role for mitigating interest rate risk, i.e. when interest rates rise long-term bonds become far less valuable.
BND holds bonds varying in maturity from 1 to 30+ years. Around one-third of all holdings are made up of 20-30 year maturity bonds. This is followed by short-term bonds (1-3 years) at around 20% and in descending order 3-5 years, 5-7years, and 7-10 years.
This distribution seems to accomplish BND’s objective of providing broad exposure to the entire bond market. The 20-30 year maturity is mostly comprised of government and municipal bonds, whereas the short-term bonds tend to be more corporate.
TLT only holds bonds with a maturity of 20-30 years. This not surprising as the 20+ mark is even included in the fund’s name. However, TLT also caps out at 30 years since aren’t any longer-term treasury bonds available than 30 years.
Generally, when comparing two funds and their composition and exposure, we want an ETF that is well diversified. When comparing BND and TLT to this metric the winner obviously is BND.
Keep in mind, however, that both funds have very different goals: BND aims to give investors the broadest exposure to the entire bond market possible, while TLT aims to give use exposure to treasury bonds while maintaining flexibility.
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BND vs. TLT – Analysis
In this part, we’ll examine some of the most common risk metrics such as volatility and maximum drawdown.
|Downside Deviation (monthly)||0.56%||2.24%|
|US Market Correlation||0.06||-0.34|
BND has a monthly volatility of 1.07% or 3.72% annualized. 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%. A good option for stability.
TLT has a monthly volatility of 4.09% or 14.18%(!) annualized. TLT’s monthly volatility is higher than BND’s annualized volatility. I’ll point out the obvious: TLT is extremely volatile.
As a result of this difference in volatility, we naturally expect the drawdowns to differ significantly as well.
In the chart below I have plotted the drawdowns for each year since the financial crisis of 2008/2009. As you can see the difference is astounding:
BND experiences several modest drawdowns anywhere up to -0.5% throughout the years. The percentage here is based on the entire portfolio value at the time. So, a $10,000 might drop down to $9,950 with a -0.5% drawdown.
TLT regularly has drawdowns of 18% and higher. This means that your portfolio of $10,000 could drop by a few thousand dollars every now and then.
BND vs. TLT – Performance
Now, for the final part, we’ll see how the differences in fund composition and risk metrics affect the overall performance of BND and TLT.
Below you’ll a chart of the annual returns from 2008 to 2020:
BND has moderate but mostly positive returns throughout the years, ranging anywhere from -1% to 8-9%. The only year where BND showed a negative return at the end of the year was 2013. For all other years, returns have remained fairly stable.
TLT’s returns vary widely by year. Some years TLT has returned close to 40% while losing over 20% in the following year. The extreme swings of TLT can be witnessed best in the interest rate change from 2008 to 2009.
Once again the differentiating factor between BND and TLT is volatility.
The graph below shows a backtested portfolio of $10,000 starting in 2008. All earnings are reinvested completely and no further contributions have been made.
|Portfolio||Initial Balance||Final Balance||CAGR|
A portfolio of $10,000 invested to 100% in BND would have resulted in $16,645 by now. This equals a CAGR of 4.19%. For comparison, the average historical returns for the S&P 500 are somewhere between 7-7.5% including dividends. For a stabilizing bond fund, BND does a remarkable job while yielding north of 4%.
A $10,000 TLT portfolio would have resulted in $25,621. This equates to a CAGR of 7.87%. Obviously, TLT greatly outperforms BND in overall returns. But at what cost?
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While we examine the differences between BND and TLT, it is important to keep in mind that both funds have different goals. And each accomplishes their goal in specific ways.
BND does not aim for the highest returns. It aims for stability and a steady stream of investment income.
TLT does not aim for stability. It aims to give investors easy and flexible exposure to long-term U.S. Treasury bonds.
In a way, both funds do a fantastic job of what they set out to do. But in total returns, TLT outperforms BND by a large margin.
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Concise and clear as a bell. Thanks.
I don’t understand why TLT is so volatile compared to 30 treasury futures.