7 Best Vanguard Bond Funds to Buy

Best known for its lineup of low-cost index mutual funds and exchange-traded funds, or ETFs, Vanguard also offers an extensive suite of fixed-income products.

With bond funds spanning government Treasurys, agency bonds, mortgage-backed securities, municipal bonds, corporate bonds, treasury-inflation protected securities (TIPS) and even high-yield junk bonds, the firm has something suitable for fixed-income investors of all objectives and risk tolerances.

In most years, an allocation to high-quality bonds provides a ballast for portfolios, reducing drawdowns and volatility. While years like 1932 and 2022 were exceptions, bonds have historically been a great counterweight to equities, especially during market crashes like those of 2008 and early 2020. During the “lost decade” of 2000 to 2010, they outperformed U.S. stocks strongly.

From Jan. 31, 2022, to Jan. 29, 2023, the benchmark U.S. 10-Year Treasury yield shot up by 97%, and was just below 3.4% as of market close on Feb. 2. With yields starting 2023 much higher than they did in 2022, bond investors may enjoy some stronger tailwinds moving forward. As yields now have more room to fall, bond prices could benefit from greater upside potential.

Whether your objective is safety of principal, steady income or tax-efficiency, this list of the best Vanguard bond funds to buy in 2023 has some great selections to consider adding to a portfolio:

Vanguard Total Bond Market ETF (ticker: BND)

The go-to option for many passive investors looking for a low-cost, highly diversified bond ETF is BND. This ETF tracks the Bloomberg U.S. Aggregate Bond Index, a popular benchmark of overall U.S. bond market performance, and charges a low expense ratio of just 0.03%.

“Aggregate bond ETFs like BND provide easy, single-ticker exposure to the largest swath of the U.S. bond market, covering U.S. Treasurys, mortgage-backed securities and investment-grade corporate bonds,” says John Croke, head of active fixed income product management at Vanguard.

With an average duration of 6.5 years, BND can be somewhat sensitive to interest rate changes. “However, if your time horizon is greater than the ETF’s duration, you will have plenty of time to recover from rate hikes as the ETF will continually reinvest in higher-yielding debt in this scenario,” Croke says.

Vanguard Total International Bond Index Fund ETF (BNDX)

Diversifying a portfolio’s bond exposure internationally can provide benefits. Holding bonds from foreign markets can hedge against idiosyncratic risks in the U.S. market, provide exposure to different interest rate regimes and sometimes produce higher yields.

“For simple international fixed income exposure, I like BNDX, which tracks the USD hedged Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index,” says Anessa Custovic, chief investment officer at Cardinal Retirement Planning.

BNDX holds a portfolio of more than 6,000 investment-grade bonds from developed and emerging markets, with an average duration of 7.4 years and a yield-to-maturity of 5.9%. For a 0.07% expense ratio, investors can combine BNDX with BND for a globally diversified bond portfolio.

Vanguard Total Corporate Bond ETF (VTC)

Investors looking for higher yields at the cost of greater credit risk can opt for corporate bonds. “Given the positive outlook for corporate fixed income over the next five to 10 years, I definitely like VTC,” Custovic says. “This ETF combines three different funds to give investors broad exposure in a single ticker.”

VTC allocates its portfolio roughly one-third each to Vanguard’s short-, intermediate- and long-term corporate bond ETFs to achieve balanced exposure across the yield curve. This mix averages out to a duration of 7.1 years and a yield-to-maturity of 5.4%.

The majority of the underlying bonds in VTC fall into the AA and BBB Standard & Poor’s credit rating categories, making it riskier than a pure Treasury fund. However, VTC makes up for that risk with a higher yield. In terms of fees, VTC charges a 0.04% expense ratio.

Vanguard Short-Term Corporate Bond ETF (VCSH)

Investors seeking high yields but wishing to mitigate interest rate risk can pick a lower-duration corporate bond ETF like VCSH. Despite its lower duration of 2.7 years, this ETF currently pays a decent yield-to-maturity of 5.2%, much higher than short-duration aggregate or Treasury bond ETFs.

“Shorter-term investment-grade bond ETFs are well suited for retirees planning to use the strategy’s income to fund expenditures over the coming two to three years, as most of these ETFs have an average duration in that general ballpark,” Croke says.

As with VTC, VCSH mostly holds corporate bonds with AA and BBB ratings, albeit with a much shorter maturity. It also charges the same 0.04% expense ratio. By adding VCSH, investors can reduce the overall duration of their bond portfolio while still targeting competitive yields.

Vanguard Long-Term Treasury ETF (VGLT)

On the other end of the yield curve and credit quality spectrum is VGLT, which primarily invests in longer-duration U.S. Treasury bonds with an average dollar-weighted maturity of 10 to 25 years. Compared to VCSH, VGLT has much higher credit quality, but greater interest rate risk.

With an average duration of 16.1 years, VGLT has high interest rate sensitivity. This benefits the ETF when rates are cut, like during the 2008 and 2020 stock market crashes. However, the ETF can lose substantial value when rates get hiked aggressively, as they were throughout 2022.

That being said, the ETF has an extremely high credit quality, with 100% of its portfolio composed of AAA-rated U.S. government debt. The risk of default here is extremely low, making VGLT a potential choice as protection for a recession. The ETF also charges a 0.04% expense ratio.

Vanguard Tax-Exempt Bond ETF (VTEB)

Interest income from most bond ETFs isn’t taxed very favorably. For tax-friendly investing, investors may prefer ETFs like VTEB, which tracks the Standard & Poor’s National AMT-Free Municipal Bond Index. Because it holds municipal bonds, VTEB is exempt from federal income taxes.

In terms of portfolio composition, 21% of the ETF is held in AAA-rated municipal bonds, with the majority in AA-rated municipal bonds. Most of these bonds are from agencies in the state of California. The ETF has an intermediate duration of 5.9 years and a yield-to-maturity of 3.5%.

VTEB is best used as a substitute for traditional bond ETFs in a taxable account to minimize tax drag. In a tax-advantaged account, the ETF offers no discernable advantages over a traditional bond ETF. In terms of fees, VTEB charges a 0.05% expense ratio.

Vanguard Short-Term Inflation-Protected Securities ETF (VTIP)

To hedge against inflation risk, investors can buy TIPS, which have their prices and thus coupon payments linked to the consumer price index, or CPI. If inflation unexpectedly spikes, the par value of TIPS will increase, along with their interest payments. That being said, they aren’t 100% reliable.

“When real interest rates are volatile, like in 2022, it can overwhelm the pure inflation-mitigating nature of TIPS in the short-term,” Croke says. “That said, over the long-run the inflation-mitigating traits of TIPS endure, making them a compelling consideration for inclusion in a retiree’s bond portfolio.”

When it comes to investing in TIPS, Custovic likes VTIP, noting that “the ETF gives you short-term TIPS exposure without having to purchase individual bonds yourself.” This ETF has an average duration of 2.4 years, a yield to maturity of 4.2% and an expense ratio of 0.04%.