The Vanguard Total Bond Market ETF (BND 0.14%) is the biggest exchange-traded fund (ETF) focused on the bond market, with over $129.5 billion of assets under management. As the name suggests, BND provides investors with broad exposure to the bond market. It holds taxable investment-grade U.S. dollar-denominated bonds, excluding inflation-protected bonds, with a range of maturities. For many investors, it's the only bond ETF they'll need.
While I like BND and hold some in my portfolio, I like the Vanguard Long-Term Bond ETF (BLV 0.38%) even better. Here's why.
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Going long for more yield
The Vanguard Long-Term Bond ETF provides investors with diversified exposure to the long-term, investment-grade U.S. bond market. Long-term bonds are those with maturities of 10 years or more into the future. Historically, interest rates on long-term bonds are higher than those with shorter maturities.
The fund holds 3,058 bonds from a variety of issuers. More than half of its bonds (51.5%) are from the U.S. government. The rest are bonds rated AAA (1.2%), AA (5.5%), A (20.4%), and BBB (21.3%) from issuers in the industrial (29.6%), finance (7.5%), and utility (6%) sectors or from foreign (2.9%) and other (2.5%) issuers. Overall, BLV holds a broad collection of high-quality long-term bonds.
While BND also holds bonds with longer-dated maturities, a larger percentage of its holdings are short-term bonds. Here's a look at how these two bond ETFs differ by holding:
|
Maturity |
BND |
BLV |
|---|---|---|
|
Under 1 year |
0.3% |
0.1% |
|
1-5 years |
43.7% |
0% |
|
5-10 years |
36.1% |
0.3% |
|
10-15 years |
3.3% |
11.9% |
|
15-20 years |
5.6% |
30.5% |
|
20-25 years |
4.2% |
21.5% |
|
Over 25 years |
6.8% |
35.7% |
Data source: Vanguard.
BLV currently has an average effective maturity of 22.2 years, more than double that of BND's 8.2-year average effective maturity. By holding primarily longer-dated bonds, BLV has a higher yield than BND, with a 5.4% yield to maturity compared with 4.7%. That higher yield enables me to generate more interest income from my bond investments.
Better long-term returns
BLV's higher yield has added up to higher returns for investors over the long term. Here's a look at how its returns have compared to those of BND:
|
ETF |
1-Year |
3-Year |
5-Year |
10-Year |
Since Inception (4/3/07) |
|---|---|---|---|---|---|
|
BND |
5.4% |
1.5% |
-0.9% |
1.5% |
3% |
|
BLV |
1.6% |
-2.3% |
-5.2% |
1.2% |
4.1% |
Data source: Vanguard.
BND has delivered a better performance than BLV over shorter periods because of the greater impact of interest rate changes on long-term bond prices. We can measure this impact by comparing the average duration of these two bond ETFs. Duration measures the sensitivity of bond fund prices to interest rate movements. For example, a bond with a duration of two years will fall by 2% for every one percentage point increase in interest rates or rise by 2% for every one-percentage-point decline in interest rates. BND has an average duration of 5.8 years, while BLV's is 13.1 years. With a higher duration, BLV is much more sensitive to short-term interest rate changes.
While its longer duration has affected it in recent years as rates rose, BLV has delivered a higher return over the long term when rates were lower. Given its currently higher yield and the fact that rates should continue falling, the ETF should deliver higher returns compared to BND from here.
Higher-income potential over the long term
BND is the biggest bond ETF for a reason. It provides broad exposure to the entire U.S. bond market. That makes it a great choice for most investors.
However, I like BLV better because it focuses on holding longer-term bonds with higher yields. While it has more exposure to changes in interest rates in the short term, it should provide me with more bond income over the long haul.
