The Best Bond Funds From Vanguard Investments

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If you are looking for the best bond funds, you'll want to include Vanguard funds in your search. Although Vanguard Investments is best known for index funds, such as the biggest mutual fund in the world, Vanguard Total Stock Market Index (VTSMX), and one of the best S&P 500 Index Funds, Vanguard 500 Index (VFINX), Vanguard offers some of the best bond funds to buy.

Advantages of Vanguard's Bond Funds

Low expenses are an important feature for the best mutual funds but having low expense ratios is especially crucial for gaining a performance edge in the world of bond funds. When just a one percent difference in returns can separate the best bond funds from the worst, the low expenses of Vanguard funds can be more an important feature for bond funds than finding the best bond fund managers. For this reason, Vanguard's low expense ratios are arguably the strongest advantage for their bond funds compared to others.

For Vanguard's index funds, the passive management provides a similar advantage for investors. For one, passively-managed funds naturally have lower expenses than actively-managed funds because there is much research and analysis needed. An index fund manager will simply track the underlying benchmark index, whereas the active manager is usually attempting to beat the benchmark. For bond funds, this benchmark is most often the Barclays Aggregate Bond Index, which is a broad bond index covering most U.S. traded bonds and some foreign bonds traded in the U.S.

Using index funds can also be an advantage because the passive management removes the risk of the fund manager making human mistakes, such as miscalculating economic conditions like the direction of interest rates.

Best Bond Funds From Vanguard

With those mutual fund advantages in mind, here are three of the best bond funds offered by Vanguard Investments:

  • Vanguard Total Bond Market Index (VBMFX): With an expense ratio of just 0.20%, investors get a big cut in costs compared to most bond funds and the lower expenses translate into better returns, especially in the long run. VBMFX tracks the Barclays Aggregate Bond Index. For periods of 10 years or more, investors can expect to meet or beat the returns of the average bond fund.
  • Vanguard Intermediate-Term Investment Grade (VFICX): Although VFICX isn't an index fund, it's expense ratio is still a low 0.20%. And although the active management style doesn't always keep it ahead of the benchmark index, the long-term returns have averaged better than index funds like VBMFX.
  • Vanguard Short-Term Investment-Grade (VFSTX): Short-term bonds typically have lower yields and lower returns, compared to intermediate- and long-term bonds but short-term bonds aren't as interest-rate sensitive, which makes them good choices when interest rates are rising. By now, if you don't already know, you may be wondering what "investment grade" means. Bonds are rated by their credit-worthiness. Depending upon the rating agency, the ratings are from AAA (highest quality) to D (in default). Investment grade is a middle ground, which typically ranges from AAA down to BBB-. An example of an AAA-rated bond is a U.S. Treasury bond. In translation, investment-grade bond funds invest in an average of medium quality bonds. The advantage for investors is that yields and long-term returns can be higher, especially in the long run, at least compared to other short-term bond funds like VFSTX.

    All three of the above Vanguard funds have a minimum initial investment of $3,000.

    Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.