2025 capped off another strong year for fixed income ETFs, as ongoing market uncertainty pushed more investors into the safe confines of bonds. When it came to inflows, it was Vanguard that was well-represented with four funds cracking the top 10.
2025 has been a year marked by uncertainty and 2026 could feature more of the same. Nonetheless, it's never too early for fixed income investors to position their portfolios to capture opportunities in the new year.
Undoubtedly, 2025 has been the year of artificial intelligence (AI) dominating the financial news headlines. With the end of the year just around the bend, valuations appear questionable, but fixed income continues to look appealing.
Undoubtedly, 2025 has been the year of artificial intelligence (AI) dominating the financial news headlines. With the end of the year just around the bend, valuations appear questionable, but fixed income continues to look appealing.
With a record-breaking year for ETFs nearly complete, it is insightful to review the topics that most resonated with the investment community. I have periodically looked at monthly sentiment for widely read content our team authored in support of our educational partners.
$1 billion in year-to-date inflows may seem minute compared to Vanguard's juggernaut bond fund, the Vanguard Total Bond Market ETF (BND), but given the narrow and niche focus of the Vanguard California Tax-Exempt Bond ETF (VTEC), the accomplishment is noteworthy. Like the rest of the muni bond market, 2025 started slow amid heavy issuance.
Investors looking for core bond exposure typically have two pathways when it comes to ETFs. One is passive options that track an index.
For any retiree nervous about the current state of the market, not only do they have a good reason to be skeptical about short-term growth, but they also have every reason to want to protect their downside.
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 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.
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.
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.