Fixed income securities have held up better than the stock market, bolstering the argument for diversifying your portfolio. The Vanguard Total Bond Market ETF (NYSE: BND ) is one of the standouts in its class by several measures. The fund holds a broad swath of fixed income securities, 80% of which are AAA-rated, and currently yields more than 5%.
The Vanguard Total Bond fund is a behemoth with nearly $65 billion in assets, and that size alone provides some measure of safety. That bulk also allows the fund to spread its assets across more than 2,900 securities, including bonds ranging from Apache (NYSE: APA ) to Target (NYSE: TGT ) , ArcelorMittal (NYSE: MT ) to Rio Tinto (NYSE: RTP ) , thus reducing the risk of any one investment significantly harming the fund. The fund tracks the Lehman Brothers Aggregate Bond Index, which consists of U.S. investment-grade, taxable fixed income securities. With roughly one-third of the fund in Treasury or agency securities from issuers like Freddie Mac (NYSE: FRE ) and Fannie Mae (NYSE: FNM ) , the fund has significantly reduced its downside risk.
Year-to-Date Return: (1.0%)
Expense Ratio: 0.11%
Assets: $64.9 billion
Fund prospects and risks
Pain is a relative concept, and while many parts of the globe have suffered steep drops in market prices, the U.S. has not plummeted quite as far. Being the current safe haven has helped to stanch the pain somewhat in domestic markets, and the breadth and depth of the U.S. economy is comforting when compared to other alternatives.
Yet, all good things come to an end, and at some point, the federal government’s recent activities are likely to lead to higher inflation -- which could pressure bond values. Another negative influence is the likelihood that capital flows will slow or reverse when the halo of safety is no longer the preeminent criteria for investors.
Investors who want the ease of trading provided by a stock but the security of fixed-income investments have a number of ETFs to select from. The Vanguard Total Bond fund is one of the least expensive options and is suitable for investors with a medium-term time horizon. The fund has been stress-tested by the recent market gyrations and has passed with distinction, posting some of the best performance numbers of its class.