Vanguard Bond ETFs: a growth story


Vanguard share classes

Vanguard introduced exchange-traded funds to bond investors in 2007 when they added an ETF share class to four bond index funds. In 2008 they added an extended maturity treasury fund consisting of zero coupon bonds. This new fund offered ETF and institutional shares.

In 2010 Vanguard introduced two new series of bond index funds: short-term, intermediate-term and long-term funds for both US government and US corporate bonds. These funds offered ETF, admiral and institutional shares.

In 2013 Vanguard introduced two international bond index funds and a short-term inflation indexed treasury index fund. These funds offered investor, admiral, ETF and institutional shares.

Vanguard exchange-traded funds are unique in that the ETFs are structured as a share class of a mutual fund and not as a standalone entity. This structure allows us to view asset flows and asset growth by means of the ratio of ETF share assets to total fund assets.

Investment grade bond funds

The four Vanguard investment grade bond index funds were founded in 1987 (total bond index fund) and 1994 (short, intermediate and long term index funds) well before the advent of exchange-traded funds. Thus, the ETF share class began as a small percentage of each fund’s asset base. Since their 2007 introduction the funds have experienced  a growing ETF share of fund assets. This has mostly been a steady rise, although the Long Term Bond Index Fund experienced sharp ETF weighting reversals in 2010 and 2013. These reversals were the result of substantial increases in institutional fund assets.

Table: Vanguard Bond funds

Year Short Term Intermediate Term Long Term Total Bond
2016 42.49% 39.07% 18.11% 18.30%
2015 41.06% 33.67% 19.20% 18.45%
2014 40.37% 28.19% 12.78% 19.05%
2013 40.78% 25.54% 8.52% 16.31%
2012 35.46% 25.28% 14.12% 15.40%
2011 31.83% 20.28% 10.55% 14.34%
2010 27.36% 16.41% 8.53% 10.49%
2009 23.00% 12.74% 11.06% 9.20%
2008 11.87% 7.16% 5.30% 4.50%
2007 6.24% 2.35% 3.48% 1.96%

Government bonds

Vanguard created short, intermediate, and long term US government bond exchange-traded funds in 2010 with an accompanying institutional share class. Admiral shares were added in 2012. Since inception, mutual fund shares have increased: admiral share class purchases have steadily increased while institutional flows have fluctuated.

Table: Vanguard Government Bond funds

Year Short Term Intermediate Term Long Term
2016 66.57% 48.04% 53.03%
2015 68.80% 38.92% 30.18%
2014 73.96% 36.44% 30.92%
2013 81.43% 31.78% 59.43%
2012 69.32% 46.67% 45.73%
2011 77.32% 30.39% 35.42%
2010 84.95% 33.33% 83.87%

Corporate bonds

The Vanguard corporate bond exchange-traded funds were created in 2007 with accompanying institutional shares. Admiral shares were added in 2012. ETF shares have maintained a clear dominate proportion of the the funds’ asset bases.

One likely explanation for ETF dominance in this asset class is liquidity preference. Corporate bonds tend to be lightly traded and are illiquid. The exchange-traded fund, under normal market conditions, is highly liquid.

Table: Vanguard Corporate Bond funds

Year Short Term Intermediate Term Long Term
2016 82.58% 90.23% 75.91%
2015 84.07% 87.63% 72.81%
2014 85.28% 88.02% 74.28%
2013 95.20% 93.22% 73.58%
2012 95.20% 91.82% 85.36%
2011 93.80% 89.07% 91.97%
2010 84.07% 95.14% 85.71%

Specialized bonds

Vanguard offered a long-term zero coupon treasury bond index fund in 2008, offering both institutional and exchange-traded shares. The institutional shares dominated the portfolio at inception. The weighting of ETF shares has increased over time.

The Vanguard Mortgage-Backed Securities ETF was offered in 2010. Admiral shares were added in 2012. ETF shares have always been the dominant holding in the fund.

In 2013 Vanguard introduced international bond index funds. The Emerging Market Government Fund offers investor, admiral, ETF, and institutional shares. Investor and admiral shares impose purchase and redemption transaction fees. The weighting of ETF shares has been dominant as investor interest in mutual fund and institutional mutual fund shares has been tepid.

The Vanguard International Bond Index Fund has been widely accepted by investors. In four years the fund has amassed 65 billion dollars in net assets. The fund has received large inflows from all share classes offered: investor, admiral, ETF, and institutional.

The bulk of the fund’s investor shares come from the fund’s inclusion in Vanguard’s 343.4 billion dollar fund-of-fund portfolios.

The Vanguard Short Term Treasury Inflation Protected Securities Fund was also introduced in  2013. The fund offers investor, admiral, ETF, and institutional shares. Investor share assets are increased by the fund’s inclusion in some of Vanguard’s fund-of-fund portfolios.

Table: Vanguard Specialized Bond funds

Year Short Term TIPs Extended MBS International EM Government
2016 15.07% 40.12% 82.52% 8.19% 78.88%
2015 14.90% 33.21% 75.61% 7.93% 76.96%
2014 13.26% 22.60% 56.69% 8.11% 63.98%
2013 14.42% 28.32% 58.49% 3.67% 59.03%
2012 25.73% 52.22%
2011 22.68% 82.95%
2010 38.10% 79.49%
2009 23.35%
2008 1.90%

 Google spreadsheet link.


Barry Barnitz, an administrator of the John C. Bogle Center for Financial Literacy site.

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