Need Core Bond Exposure? Here Are Passive & Active Options
Investors looking for core bond exposure typically have two pathways when it comes to ETFs. One is passive options that track an index.
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BND: Earnings Yields, Rate Cuts, And Mean Reversion Point To A Strong Buy
Vanguard Total Bond Market Index Fund ETF offers a higher yield and lower volatility than equities, making it attractive amid stretched stock valuations. BND currently yields 3.78%, surpassing the S&P 500's 3.21% earnings yield, with only one-third the risk and superior risk-adjusted returns. Long-term mean reversion and recent bond underperformance suggest BND could deliver 6-6.5% CAGR over the next decades, far outpacing stocks on a risk basis.
As International Bond Demand Rises, Consider This ETF Trio
As fund flows during the month of July indicated, more investors continue to head overseas in order to get international bond exposure according to data from Morningstar. For those looking to overcome their U.S. bond home country biases, Vanguard has three funds that are worthy of consideration.
BND: Watch Out For The Drop In Real Yield
Short-term rate cuts may boost BND, but persistent inflation above 2% will compress real yields, reducing its competitiveness. That said, I acknowledge that BND is the leading passive U.S. aggregate bond ETF, offering low costs, high liquidity, and strong tracking of its benchmark. Political interference with the Fed poses systemic risks, potentially impacting yields and BND's performance.
BND: From Coupons To Fluctuations
Vanguard Total Bond Market Index Fund ETF offers broad diversification, high credit quality, and moderate duration, making it ideal for conservative fixed-income investors. The fund's passive resampling strategy minimizes costs and tracking error, while its sensitivity to interest rates remains slightly below its benchmark. Current macro indicators—OIS spread, forward rates, and yield curve slope—signal stable liquidity, moderate rate expectations, and no imminent financial stress.
Defense, Yield, or Both? An Active Bond ETF for Any Market
Elevated interest rates and market uncertainty make for an interesting tandem regarding getting core bond exposure. When considering yield, reinforcing a portfolio to absorb market shocks, or both, consider this active option from Vanguard: the Vanguard Core-Plus Bond ETF (VPLS).
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2 Options to Take Advantage of a Bond Rally
Early signs of diminishing economic activity and inflation could be a harbinger for bond prices to rise. If so, consider taking advantage of a potential bond rally with a pair of ETFs from Vanguard.
BND: When Diversification Becomes Diworsification
BND offers low-cost, low-risk, broad bond market exposure, but its real returns have been mediocre and barely outpaced inflation. The fund's heavy diversification leads to underperformance compared to more focused bond ETFs, echoing Peter Lynch's 'diworsification' warning. Current macro risks—persistent inflation and high deficits—mean BND faces significant interest rate risk, limiting its near-term upside.
BND: U.S. Credit Downgrade Is Another Nail In The Coffin For Bonds
Moody's downgrade and surging interest costs signal a tipping point, with over half of US tax revenue potentially going to interest by 2028. BND faces long-term downside risk of 15-35% as inflation expectations rise and global demand for Treasuries wanes, evidenced by gold's outperformance. If the Fed loses independence, BND could decline faster as the likelihood of pro-inflation dovish policies grows.
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I'm on a mission to produce more passive income. My strategy is to grow my passive income so that it can cover my basic living expenses.
