Broad Bond Exposure On The Cheap

As is the case with equity-based exchange traded funds, fixed income ETFs are enjoying a record pace of asset gathering in 2017 and low-cost bond funds are leading that charge. One of the low-cost leaders among bond ETFs is the Vanguard Total Bond Market ETF (NYSE:BND).

BND charges a scant 0.05 percent per year, the equivalent of $5 on a $10,000 investment. That makes BND cheaper than 93 percent of competing funds. The low fee is likely one reason why BND has added $4.82 billion in new assets this year, good for one of the highest totals among all bond ETFs. Investors considering BND should note the ETF is heavily allocated to U.S. Treasuries.

The fund's exposure to Treasuries has increased over the past decade and is now 20 percentage points higher than the category average, Morningstar said in a recent note. However, this fund delivers a higher SEC yield than the category average because it has a slightly more aggressive interest rate risk profile.

Big, But Not Necessarily Diverse

BND holds a whopping 8,271 bonds, but nearly two-thirds of the ETF's holdings are either Treasuries or mortgage-backed securities. While that keeps BND's credit quality high, the lack of exposure to corporate and foreign bonds suppresses the ETF's yield. BND yields just 2.45 percent.

The portfolio's bias toward highly rated securities provides a safety net against market downturns, but it also limits its return potential, said Morningstar. The fund's annual return of 4.1 percent over the trailing 10 years through October 2017 was behind the average return of its surviving peers by 20 basis points. Its risk-adjusted return, as measured by Sharpe ratio, was slightly behind the category average as well.

BND has an average duration of 6.1 years, making this more of an intermediate-term fund. Duration measures a bond's sensitivity to interest rate changes.

Low Credit Risk

While BND's duration or interest rate risk is slightly above the category average, the ETF features minimal credit risk.

The portfolios interest rate risk is partially offset by its low credit risk, said Morningstar. Unlike some of its category peers that invest in both investment-grade and sub-investment-grade bonds, this fund is limited to investment-grade bonds. And nearly 40 percent of its portfolio is allocated to Treasuries.

Morningstar has a Silver rating on BND.

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