BND ETF Review: Vanguard Total Bond Market Index Fund

Is BND The Best Vanguard Bond Market Index Fund?

BND ETF review

Let’s head into the bond world today and work through a BND review.

BND is the ticker symbol for the Vanguard Total Bond Market ETF (NASDAQ: BND).  So, what’s my reason for publishing a BND review?

BND Review

First of all, BND is one of the core bond holdings in my investment portfolio.  Furthermore, I recently recommended BND to a friend.

I suggested she invest her Roth IRA into 2 exchange-traded funds.  50% allocated to BND.  And 50% allocated to the Vanguard Total Stock Market ETF (NYSEARCA: VTI).

My friend is very busy and she needed a simple investment strategy.  By following my suggestion she has an easy to manage 2 Vanguard fund portfolio.

Are you interested in more about my friends investing story?  And specifically, about the Vanguard Total Stock Market ETF (VTI).  Then, check out my VTI ETF review.

I bring this up, because you too may be interested in a simple, easy to manage investing strategy.  If so, give both this BND review and my VTI review a good read.

And consider allocating your investments 50/50 to these 2 exchange-traded funds.  Or, an asset allocation appropriate for your age and risk tolerance.  That is if this approach meets your personal finance and investing objectives.

No further delays. Let’s dig into our Vanguard Total Bond Market Index Fund review right now.

Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.

ETF Definition

Let’s start with the basics.  I will summarize the definition of an ETF from Investopedia.

An exchange-traded fund (ETF) is a collection of securities—such as stocks or bonds—that tracks an underlying index.

An ETF is called an exchange-traded fund since it is traded on an exchange just like individual stocks and bonds. The price of an ETF’s shares will change throughout the trading day as the shares are bought and sold on the market.

Open-end mutual funds are similar to ETFs.  They are also a collection of investment securities.  But in contrast, they are priced and trade only once per day after the markets close.

ETF Further Explained

So, make one small investment in your brokerage account. And you get immediate ownership of many stocks or bonds, rather than just one.

Thus, BND provides instant diversification.  And that is a big difference between buying a single bond versus investing in Vanguard’s BND ETF.

So, we are talking about bonds here.  Let’s make sure we understand exactly what a bond is before we move any further with our BND review.

What Is A Bond?

vanguard total bond market index fund

A bond is a loan made by an investor to a borrower. Usually, the borrower is a corporation or government entity.

First of all, the investor can also be thought of as a lender. Furthermore, a lender has money and desires to loan it out to an entity.  Finally, the borrower can use the money to fund its operations.

The lender has 2 primary objectives.  First of all, earn interest payments on the bond.  And get paid back when the bond comes due.

It’s not much different than loaning money to a friend.  You want to get paid interest income on the loan.  And you want to get paid back the amount you loaned at an agreed-upon time in the future.

So, in its most simple terms, a bond is an I.O.U. between the lender and the borrower.  Bond details are much more formal than a loan between you and a friend.

All the “fine print” is laid out in legal documents.  Bond details include the date when the principal must be paid back to the lender.  Other details usually include the terms for variable or fixed interest payments made by the borrower.  And, what happens if the borrower is unable to pay the interest or the principal at the stated times.

So, we know what an ETF is.  And we understand bonds.  Let’s start putting these topics together as they relate specifically to our BND review.

Our ETF definition mentioned that BND seeks to track an index.  Let’s talk more about the index next.

BND Tracks An Index

What index does BND track?  The BND index is known as the Bloomberg Barclays U.S. Aggregate Float Adjusted Index.

This index is also called the Agg. It is a broad-based, bond market index representing intermediate-term investment-grade bonds traded in the United States.

Source: Wikipedia – Bloomberg Barclays US Aggregate Bond Index

The index includes government securities, mortgage-backed securities, asset-backed securities, and corporate securities. It seeks to simulate the universe of intermediate-term investment-grade bonds in the U.S. market.

Furthermore, the Agg consists of securities that have at least one year to maturity.  Finally, bonds in the index must have an outstanding par value of at least $100 million.

Source: Investopedia – What Is the Agg?

So now, we have our foundation knowledge set in place.  First of all, we know what an ETF is.  Furthermore, we know what a bond is.  Finally, we understand which bond index the BND ETF seeks to track.

Learning about investing can be fun. But, let’s move on. Next, we will head over to Vanguard and see what they have to say about their very own BND ETF.

BND ETF Overview From Vanguard

Here is what Vanguard has to say about BND…

The fund’s investment objective is to track the performance of a broad, market-weighted bond index. Specifically, BND:

  • Provides broad exposure to the taxable investment-grade U.S. bond market
  • Excludes inflation-protected bonds and tax-exempt bonds
  • Offers relatively high potential for income from an investment portfolio of bonds
  • Limits portfolio volatility since the share price tends to rise and fall modestly
  • It may be appropriate for medium to long-term financial goals
  • Is suitable for diversifying the risks of stocks in a portfolio

BND Holdings

BND has nearly 10,000 individual bond holdings in the portfolio.  That’s right; you get thousands of bonds with one single purchase of BND.

The 10 largest holdings comprise less than 10% of the BND ETF.  But, it’s hard to get a feel for the composition of the ETF from the top 10 holdings.

So, I think we can get a better understanding of the fund by looking at the sectors represented.  What I mean is the market sectors in which the borrowers operate.

Table 1: Vanguard Total Bond Market Index Fund Top Sectors

Issuer Sector% of BND
U.S. Treasury/Agency42.0%
Corporate29.7
Mortgage-backed22.8
Foreign5.0
Asset-backed0.5
Total100%

By looking at table 1, it’s clear that U.S. government debt represents a large component of the fund’s assets.

This illustrates an issue with the Vanguard BND ETF, in my opinion.  What’s that?  Well, U.S. government debt comprises a large chunk of the U.S. bond market.

Since BND follows along as it tracks the index.  Therefore, the fund is somewhat concentrated in bonds issued by the U.S. government.

For now, it’s not a big risk or concern.  First of all, the U.S government is very credit-worthy. Secondly, for now, treasury debt is suitable for a defensive approach to investing.

But you never know what might happen?  Especially as the U.S. piles up more and more debt every day of the year.

Let’s move on to BND’s distributions. I’m an income investor at my core.  Regular readers know I love my dividend payments from stocks.

So, we will discuss that topic next.  To start, I want to answer a typical question some bond ETF investors may have about dividends.

Do Bond ETFs Pay Dividends?

bnd dividend

The short answer to this question is yes.  Bond ETFs pay dividends.  But, I’d like to explain a little more.

The income paid to investors or lenders from individual bonds is referred to as interest.  Or, interest income.

But collectively, when multiple bonds are held by a fund, the interest from each bond is accumulated. And, periodically paid out to investors in the ETF.  When this is done, the passive income is a dividend distribution by the stock.

Next, let’s talk about BND dividends in detail.

Does BND Pay Dividends?

Yes.  BND pays a dividend.  Just like the average bond ETF, as I explained in the last section.

BND’s dividend comes from 2 different sources.  The primary source is the interest paid on each bond.

The second source is generated from realized capital gains on the funds individual bond holdings.  Capital gains are realized when 1) a bond held in the ETF is sold or matures, and 2) the price at that time of sale or maturity is higher than the original price paid for the bond.

How Often Does BND Pay Dividends?

BND pays monthly dividends.  For a total of 12 dividend payments each year.

The first 11 dividend payments during the calendar year are composed of interest from the bonds in the fund.  The 12th and final dividend payment includes both the last month’s interest and realized capital gains from the entire year.

The amount of each month’s per share dividend payment is different. It depends on which bonds in the BND portfolio pay dividends. And, the timing of when they do so.

That being said, the monthly dividends paid are fairly similar.  So, if you need a consistent dividend payment each month to cover your living expenses, then BND may be a good option to consider.

Vanguard Total Bond Market Index Fund Dividend Rate

Over the past 6 months, BND’s cumulative dividends paid per share were $1.01.  Taking this rate times 2 will give us a reasonable estimate of the current annual dividend payment.  That is $2.02 per share.

BND Dividend Yield

At the recent BND ETF share price, this dividend payout translates to a 2.3% BND dividend yield.

One word of caution about the current BND dividend.  Versus what I expect moving forward.

What do I anticipate?  Well, I expect that the BND dividend per share and dividend yield will drop in future months?  Why is that?

Because of the world health crisis and recession it created, interest rates in the United States have dropped to all-time lows.  As a result, when bonds in the BND portfolio mature, they will be replaced with bonds having lower interest rates.

Lower interest rates mean lower interest payments.  And those interest payments will fund a smaller monthly dividend distribution from BND.

When Is The BND Dividend Pay Date?

During February through December, the dividend payable date is usually on the 4th business day of the month.  A second dividend is paid late during the last week of December to bring the total payments for the year to 12.

As an investor in BND, to receive the next dividend payout, you must complete your purchase by the ex-dividend date.  BND’s ex-dividend date falls on the 1st business day of each month from February through December.  For the year’s last dividend paid at the end of December, it comes just before the Christmas holiday.

BND Performance: Total Return                               

vanguard BND ETF

During the last 10 years, BND’s investment returns have been what you might expect from an intermediate-term investment-grade bond fund.  It has averaged about 3.6% per year.

Since its inception in 2007, BND has returned 4.5% per year.  Looking forward, I believe BND will return roughly 3% per year.

The returns since its inception are not sustainable, in my opinion.  Investment returns in the future will be lower because of the rock bottom interest rates we have as of the publication date of this article.

BND Expense Ratio

This is an area where ETFs in general and Vanguard specifically offer high performance.  That is the area of low costs.

BND’s expense ratio is a super small .035%.  In other words, if you have a balance of $100 in BND for the year, Vanguard will charge you only 3.5 cents.  A $1,000 balance will cost you 35 cents.  And that is for the whole year!

You get the idea.  This is truly low cost investing at its finest.

Beyond the .035% Vanguard management fee, don’t forget to buy and sell stocks and ETFs for free.  There is no need to pay a commission when you buy BND or any other ETF for that matter.

I trade for free using the Webull app.  And you can too.  You can open your Webull account here.

Next up, let’s compare and contrast BND with several other popular bond ETFs.

BND Vs. AGG

AGG is the ticker symbol for the iShares Core U.S. Aggregate Bond ETF.

iShares is a subsidiary of Blackrock, another large asset management company like Vanguard.  Blackrock is responsible for issuing and marketing iShares investment products.

In my mind, AGG and BND are very similar.  They track the same index.  And have virtually identical investment returns.

BND has a slightly lower expense ratio.  AGG has been in existence longer.  But BND has a larger asset base.

Trying to decide between the two?  Well, flip a coin.  Or, go with the brand you trust and work with more.  Vanguard or Blackrock iShares.

BIV vs. BND

BIV is the ticker symbol for Vanguard’s Intermediate-Term Bond ETF.  There is one primary difference between BND vs. BIV.

That being, BIV does not hold mortgage-backed securities (MBS). A mortgage-backed security is a type of asset-backed security that is secured by a real estate mortgage or collection of mortgages.

This difference gives BIV a greater weighting to other bond sectors.  Specifically, U.S government bonds and investment-grade corporate bonds.

BND vs. BLV

BLV is the ticker symbol for Vanguard’s Long-Term Bond ETF.  There are two main differences between BLV vs. BND.

The first difference is the same as the comparison to BIV.  BLV does not hold mortgage-backed securities.

The second difference is the term of the bonds held in BLV.  BLV holds long-term bonds.  While, as we know, BND holds intermediate-term bonds.

Long-term bonds have higher interest rates.  They generate more interest or dividend income for the investor.  On the other hand, long-term bonds carry greater risk.

The 1st risk is credit risk.  The longer until a bond matures means that the borrower has to remain solvent for a longer period.

For example, it’s one level of risk to expect to be repaid by a borrower in 1 year.  Versus, expecting to be repaid in 30 years.

Unlike 12 months, a lot can go wrong during 30-years.  It’s hard to predict the future that far out.

As a general rule, investors dislike uncertainty.  And demand a greater return on investment for dealing with that uncertainty.

The 2nd risk is interest rate risk.  Bond prices have an inverse relationship with interest rates.

Higher interest rates, mean lower prices for bonds trading in the market.  With interest rates at all-time lows, rates have only one direction to go.  That direction is up!  And that means the potential for falling long-term bond prices.

Before we wrap up, I would like to address a couple of frequently asked questions.  One of which I stated in the subtitle for the article.

Is BND A Good Investment?

is bnd a good investment?

A good investment always depends on your investment objectives.  If your objectives include

  • Earning a predictable stream of dividend income
  • Having relatively low share price volatility
  • Diversifying your investment assets away from stocks and the stock market
  • Accepting a very modest long-term return on investment

Then yes, BND is a good investment suitable for an income portfolio, versus a growth investment portfolio.

How Safe Is BND?

BND is on the lower end of the risk spectrum.  However, the bonds held in the fund are not guaranteed.

So, the risk of losing money does exist.  But overall, the fund has a higher degree of safety than many alternatives for your investment dollars.

Bonds held by BND are secured in different ways depending on the bond.  First of all, U.S. government bonds are backed by the full faith and credit of the U.S government.  Furthermore, mortgage bonds are secured by tangible assets in the form of real estate.  Finally, corporate bonds held in the fund are issued by businesses with investment-grade credit ratings.

Is BND The Best Vanguard Bond Index Fund?

Once again, the answer to this question depends on your investor profile and money management objectives.

Do you desire just 1 bond fund for your entire investment portfolio?  If you answered yes to that question, then I think BND is the best Vanguard bond index fund.

On the other hand, the BND ETF has some limitations.  First of all, it is heavily weighted with U.S. government debt.  Furthermore, it holds no tax-exempt bonds, inflation-protected bonds, or higher-yield junk bonds.  Finally, bonds from foreign issuers outside of the U.S. represent a very small portion of the fund.

So, is a greater level of diversification within the world-wide bond market your goal?  If yes, then BND is likely not the best Vanguard Bond Index fund for you.

Okay. Let’s wrap this up by summarizing the facts about BND.

Vanguard Total Bond Market Index Fund ETF (BND) Fact Sheet & Summary

BND is not 1 of the most fun investments you are going to find. In fact, it is kind of boring. But it has a place in diversified investment portfolios.

Here is a quick fact sheet and summary from this article about the Vanguard Total Bond Market Index Fund ETF – BND:

  • Intermediate-term bonds across the U.S. bond market held by the fund
  • Diversification among about 10,000 bonds
  • Good core bond option for a diversified investment portfolio
  • Heavily weighted toward U.S. government debt
  • Modest dividend yield of a little more than 2%
  • Low cost
  • Low initial investment requirement: 1 share is less than $100

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Disclosure & Disclaimer: I am not a licensed investment adviser, financial adviser, or tax professional. And I am not providing you with individual investment advice, financial guidance, or tax counsel. Furthermore, this website’s only purpose is information & entertainment. And we are not liable for any losses suffered by any party because of information published on this blog.

I own the Vanguard Total Bond Market Index Fund ETF