When it comes to investment-grade bond funds, sometimes fixed income investors need to take a closer look at the composition of its holdings in order to assess whether it’s truly investment-grade. Vanguard has three exchange-traded funds (ETFs) that live up to the investment-grade designation.
The Vanguard analytics team combed through almost 1,200 portfolios of advisors and ranked them from top to bottom in terms of active fund exposure. The results of the analysis in a Vanguard Portfolio Perspectives noted that active fund exposure, in particular, carried a higher degree of below-investment grade debt compared to their passive index peers.
“In 2023, our Portfolio Analytics & Consulting Group analyzed 1,178 advisor fixed income portfolios, which were then ranked by active fund exposures,” the report said. “The portfolios in the top quartile (more active-based) had an average exposure to below investment-grade credit (high yield) of 18.85%, while the portfolios in the bottom quartile (more index-based) had an average exposure to high-yield of just 1.04%.”
When an active fund presents investors with a high-yielding option, it may be to counter the higher costs typically associated with active funds by allocating capital to riskier debt. That said, advisors erring on the side of index funds exhibit higher credit quality.
“The reality is that advisors who favor index funds tend to have higher credit qualities (not lower) compared to their peers,” the report added. “As a result, advisors are more likely to decrease concentration risk and increase credit quality by using bond index funds.”
3 Investment-Grade Options
To get the highest degree of credit quality, Vanguard offers three funds to attain this exposure:
- Vanguard Total Bond Market Index Fund ETF Shares (BND): seeks to track the performance of the Bloomberg U.S. Aggregate Float Adjusted Index. The 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.
- Vanguard Intermediate-Term Bond ETF (BIV): tracks the Bloomberg U.S. 5–10 Year Government/Credit Float Adjusted Index. That is a market-weighted bond index that covers investment-grade bonds with a dollar-weighted average maturity of five to 10 years.
- Vanguard Total Corporate Bond ETF Shares (VTC): seeks to track the performance of the Bloomberg U.S. Corporate Bond Index, which measures the investment-grade, fixed-rate, taxable corporate bond market. The index includes U.S.-dollar-denominated securities publicly issued by industrial, utility, and financial issuers.
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