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First, a couple of housekeeping items. This article was written around 1 p.m. Eastern time Monday. As of this writing, fears of a “Black Monday” sequel appear to have been allayed, but there were also three hours left in the trading day so it’s possible stocks sold off mightily into the close.
Second and also as of this writing, 10-year Treasury yields were pointed lower as seemingly every experts and noted investor was calling for the Federal Reserve to conduct an emergency rate cut. Some market observers are demanding/hoping for the Fed to immediately cut borrowing costs by as many as 75 basis points.
That is to say the starts could finally be aligning for bonds and perhaps at the expense of equities at that. It remains to be seen if the Fed cuts rates, though it’s growing more probable, but advisors can prepare with aggregate bond strategies. Those include exchange traded funds such as the Vanguard Total Bond Market ETF (BND).
The $107.3 billion BND, which tracks the widely observed Bloomberg U.S. Aggregate Bond Index, is one of the largest and cheapest fixed income ETFs. Those traits coupled with Vanguard branding also make BND one of the most recognizable passive fixed income funds. More importantly, the ETF could be relevant here and now.
BND Could Be Bet Worth Examining
BND is home to 11,220 bonds – a massive lineup to be sure, but two-thirds of the roster is comprised of U.S. government debt. That could be just what the doctor ordered should rates and stocks falls in tandem.
“This conservative risk allocation can help performance during credit shocks,” observes Morningstar analyst Lan Anh Tran. “For instance, the fund offered superior protection during both the 2008 financial crisis and the March 2020 coronavirus drawdown. However, it can lag when credit risk pays off, such as during the latter half of 2020. Active funds in the category can dip into riskier assets to find pockets of opportunities.”
Though BND isn’t a long-dated ETF – its duration of six years puts it in intermediate-term territory – the fund’s duration has increased in recent years because many corporate borrowers took advantage of low interest rates prior to 2022 to issue longer-dated bonds.
“Category peers tend to hold shorter-duration portfolios, so the fund tends to lag its peers when interest rates rise. Nonetheless, a broad scope and low fee should still provide a performance edge over category peers in the long run,” adds Tran.
In part, that explains why BND, like its peer the iShares Total Core US Bond ETF (AGG), is off 6.3% over the past three years.
BND Has Vanguard Hallmarks
BND has many of the hallmarks of Vanguard ETFs that advisors and clients have come to know and love. That includes a low expense ratio. BND charges just 0.03% per year, or $3 on a $10,000 investment, well below the category average of 0.56%.
That low fee coupled with low credit risk and overall conservative positioning has helped BND stack up well against rival ETFs over long holding periods.
“From its 2007 inception through June 2024, this ETF has outperformed the category average by 28 basis points annualized,” concludes Tran. “Much of this outperformance comes from its conservative risk profile and overweighting in US Treasuries. This provided better protection during credit shocks as investors fled to the safe haven provided by Treasuries. For instance, the fund did significantly better than most of its category peers during the 2008 global financial crisis, outpacing the category average by 6.84 percentage points during the trough of the shock. Similarly, the fund beat its average peer by 2.13 percentage points during the covid-19 shock in early 2020.”
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