2 Options for Core Exposure as Investors Scramble to Bonds

Taking advantage of yields now before the Federal Reserve loosens monetary policy has caused investors to scramble for bond exposure amid record issuance in 2024. Prospective investors looking to add core exposure to their portfolios can consider a pair of ETFs from Vanguard.

Per Morningstar, this scramble toward bonds resulted in “$113 billion into bonds globally this year through Feb. 28, roughly half the $234 billion that flowed into money-market accounts, but well above the $84 billion that went into equities,” per data from BofA Global and EPFR. As such, bond funds are seeing massive inflows in 2024 that are already eclipsing inflows from the previous year.

“With central banks being at their peaks for this cycle, the big-picture idea that investors have is that we should be in bonds right now,” said Robert Tipp, chief investment strategist at PGIM Fixed Income.

Given the recent move to bonds, a wide array of options exist for investors to obtain core exposure. That said, there are ETFs from Vanguard that can drill down on passive and active strategies.

A Passive and Action Option

When getting passive exposure, investors can consider the diversified Vanguard Total Bond Market Index Fund ETF Shares (BND), which seeks to track the performance of the Bloomberg U.S. Aggregate Float Adjusted Index. That index represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States, including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than one year. BND comes with a low expense ratio of 0.03%.

With their expense ratios more competitive versus their passive counterparts in the current market environment, the accumulation of assets by active ETFs saw a banner year in 2023. Given this, fixed income investors may want to consider active funds like the Vanguard Core Bond ETF (VCRB). Active management helps maintain pliability, especially if the bond market becomes volatile. Furthermore, holdings come under the auspices of experienced portfolio managers.

Similar to BND, VCRB mitigates credit risk via diversified exposure to the U.S. investment-grade bond market. That doesn’t mean sticking strictly within the safe confines of U.S. Treasuries. Like BND, the actively managed VCRB extends its exposure to other fixed income assets for diversification, including mortgage-backed securities and corporate securities. Again, with the active exposure that VCRB offers, investors are able to harness the portfolio management capabilities of the Vanguard Fixed Income Group with only a 0.10% expense ratio.

For more news, information, and analysis, visit the Fixed Income Channel.