Investors are increasingly looking to cheap options, no matter the investment environment. Cheap index-based ETFs have been the go-to choice among long-term investors through rain or shine. Despite increased anxiety through volatile periods like the financial downturn, many long-term investors did not engage in panicked trading but opted stay the course.
One of the least expensive (and largest) fixed income ETFs on the market today is the Vanguard Total Bond Market ETF (NYSEArca: BND). BND has an annual fee of just 0.05%, or $5 on a $10,000 investment, making it less expensive than 93% of rival funds.
Among the forerunners of cheap ETF options, Vanguard Group has been among the beneficiaries of the recent surge in popularity of low-cost investment options and is now the second largest ETF provider in the U.S. Vanguard has over 70 U.S.-listed ETFs with $784.8 billion in assets under management and an average 0.11% expense ratio.
BND “tracks the market-cap-weighted Bloomberg Barclays U.S. Aggregate Bond Index, which includes investment-grade, U.S.-dollar-denominated bonds with at least one year until maturity,” according to Morningstar. “The portfolio currently consists of roughly 40% Treasury bonds, 20% government-guaranteed mortgage-backed securities, and 40% investment-grade corporate bonds. Accordingly, it carries low credit risk, which can limit its return potential. However, its cost advantage partially offsets this drawback.”
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BND holds nearly 8,300 bonds, nearly two-thirds of which are U.S. Treasuries or mortgage-backed securities (MBS). The ETF has an average duration of 6.1 years. Duration gauges a bond’s sensitivity to changes in interest rates. Many bond market participants expect the Federal Reserve to raise interest rates for the third time this year at its December meeting.
Due to its cap-weighted methodology, BND holds highly-rated bonds, which limits credit risk.
“The portfolio’s bias toward highly rated securities provides a safety net against market downturns, but it also limits its return potential,” said Morningstar. “The fund’s annual return of 4.1% over the trailing 10 years through October 2017 was behind the average return of its surviving peers by 20 basis points. Its risk-adjusted return, as measured by Sharpe ratio, was slightly behind the category average as well.”
Morningstar has a silver rating on BND.
For more information on the fixed-income markets, visit our bond ETFs category.