Looking For More Bond Exposure? These ETFs May Be Solid Options

Both the Vanguard Total Bond Market ETF (BND 0.29%) and Fidelity Total Bond ETF (FBND 0.29%) aim to provide core fixed-income exposure for investors seeking regular income and a buffer against stock market volatility. This comparison explores the opportunities and risks associated with these bond ETFs.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year weekly returns. The 1-yr return represents total return over the trailing 12 months.

BND is more affordable with its 0.03% annual fee, while FBND's 0.36% expense ratio is over 10 times higher. However, FBND currently offers a higher dividend yield, which may appeal to income-focused investors.

Performance & risk comparison

What's inside

Launched in 2014, FBND casts a wide net of bond holdings with 4459 assets, and 67% of its bond holdings are rated AAA, the highest rating for a bond, indicating a very low risk of default from the issuer. However, the ETF also invests up to 20% of its assets in lower-quality debt securities, such as BBB-rated debt, which are riskier but can offer a higher yield.

BND has been around for 7 years longer; thus, its holdings are substantially higher at 15,000. It has a higher concentration of AAA stocks at 72.45%.

What this means for investors

While fixed-income ETFs are generally less volatile than stock-based funds, investors should still understand the risks and opportunities they carry. Because BND and FBND invest entirely in bonds, their prices often track similar interest-rate trends.

Bond prices typically rise when interest rates fall because older bonds with higher fixed coupons become more attractive than newly issued bonds. When interest rates rise, bond prices can inversely drop, and volatility can become significant, especially for certain bond types.

Both BND and FBND hold most of their assets in high-quality, investment-grade bonds, which helps reduce volatility compared with lower-rated debt. However, because FBND allocates around 20% of its portfolio to lower-quality bonds such as BBB- and BB-rated bonds, it carries a higher-risk/higher-reward profile, since lower-rated bonds tend to offer higher yields but come with greater default risk.

Both funds have monthly dividend payouts, so the frequency is higher than the common quarterly pattern, which may be more appealing. Overall, both ETFs are similar, but if investors prefer a higher-paying dividend yield with more risk, then FBND edges out BND. Those looking for a cheaper, more stable investment would find BND more ideal.

Glossary

ETF: Exchange-traded fund that trades on stock exchanges like a stock, holding a basket of assets.
Expense ratio: Annual fund operating costs expressed as a percentage of the fund’s average assets.
Dividend yield: Annual dividends paid by a fund divided by its current share price, expressed as a percentage.
Beta: Measure of a fund’s price volatility compared with a benchmark index, often the S&P 500.
AUM: Assets under management; the total market value of all assets a fund manages.
1-yr return: Total return an investment generated over the past 12 months, including price changes and income.
Max drawdown: Largest peak-to-trough decline in a fund’s value over a specified period.
Growth of $1,000: Illustration showing how a $1,000 investment would have changed in value over time.
Core fixed income exposure: Foundational bond holdings intended to provide income and reduce overall portfolio volatility.
Investment-grade bond: Bond rated as relatively low risk of default by major credit rating agencies.
Sector tilt: When a fund holds more investments in certain industries than the broad market weightings.
Market-weighted approach: Strategy that weights holdings based on each security’s market value relative to the total market.

For more guidance on ETF investing, check out the full guide at this link.