Let's start with the basics. An exchange-traded fund (ETF) is a set of securities, such as stocks and bonds, that track an underlying index. ETFs are called exchange-traded funds because they trade on exchanges like individual stocks and bonds. The price of an ETF changes during the trading day as stocks are bought and sold in the market. Mutual funds are similar to ETFs. They are also a collection of investment securities. However, ETF pricing and trading occurs once a day after the market closes. In other words, you invest a small amount of money in securities. With an ETF, you can own not just one, but a whole bunch of stocks or bonds at once. In this way, BND provides instant investment diversification. This is the key difference between buying a single bond and investing in the BND Vanguard ETF. You can also read our article on other relevant ETFs.
↑ What is a bond?
A bond is a loan made by an investor to a borrower. Typically, the borrower is a company or government agency. Specifically, the investor can be thought of as a lender. In addition, the lender has money and wants to lend it to the company. Finally, the borrower can use the money received to finance its own activities. Investors have two main objectives. First, they want to earn interest on the bond. Second, they want to receive income when the bond matures. This is not much different than if you lend money to a friend. You want to receive interest on the loan and you want the borrowed amount to be paid back to you at an agreed upon time in the future. So, simply put, a bond is a loan agreement between an investor and a borrower. However, the details of a bond are much more formal than a loan between you and a friend. All the “fine details” are spelled out in a legal document.
↑ BND follows an index
What index does a BND follow? The index for BND is the Bloomberg Barclays US Aggregate Float Adjusted Index. This index, also called Agg, is a broad bond market index that tracks the market for U.S. investment-grade corporate bonds with maturities greater than two years. This index includes government bonds, mortgage-backed securities, asset-backed securities, and corporate bonds. It is designed to track medium-term investment-grade bonds in the U.S. market. In addition, Agg includes securities with a maturity of at least one year. Finally, the value of bonds included in the index must be at least $100 million.
↑ BND ETF Overview
The fund's investment objective is to track the performance of a broad market-weighted bond index. BND offers broad exposure to the investment grade U.S. taxable bond market. It does not include inflation-protected and tax-exempt bonds. It offers relatively high return potential for an investment grade bond portfolio. The volatility of the portfolio is limited as stock prices tend to move moderately up and down. It is suitable for achieving medium and long-term financial goals. It is also suitable for diversifying the risk of stocks in the portfolio. The BND portfolio contains almost 10,000 individual bonds. That's right, with just one purchase of BND you can get thousands of bonds. The 10 largest bonds make up a relatively small portion of the BND ETF. Therefore, it is difficult to understand the composition of an ETF fund based on the 10 largest assets. You can understand the composition of the fund by looking at the sectors.
The top sectors of the Vanguard Total Bond Market Index Fund:
- U.S. government/government bonds 46%
- Corporate and other debt 31%
- Mortgage-backed bonds 20%
- Foreign 3%
U.S. government bonds make up the majority of the fund's assets. U.S. Treasury bonds make up the majority of the U.S. bond market. BND tracks an index, so in a sense the fund is focused on bonds issued by the US government. At the moment, this doesn't pose much risk or cause for concern. First, the US government has a very high credit rating. Second, Treasury bonds are a good defensive investment at the moment. However, you never know what could happen, especially as the U.S. gets deeper into debt every day.
↑ Do bond ETFs pay dividends?
The simple answer to that question is yes. Bond ETFs do pay dividends. However, I want to talk about this in a little more detail. The income paid to investors and lenders on individual bonds is called interest or interest income. However, when a fund holds multiple bonds, the interest on each bond is compounded. They are then paid regularly to investors holding the ETF. In this case, passive income is dividends from stocks.
↑ How often does BND pay dividends?
BND pays dividends every month. There are 12 dividend payments per year. The first 11 dividend payments of the calendar year consist of interest on the fund's bonds. The last 12 dividend payments consist of interest from the previous month and capital gains realized during the year. The amount of monthly dividends per share varies. It depends on which bonds in BND's portfolio pay interest and when it occurs. With that in mind, monthly dividend payments are pretty similar. So if you need a fixed monthly dividend to cover your living expenses, BND could be a good option.
↑ Yield
From inception in 2007 through the end of 2024, BND's yield has been around 2.8% per year. BND's yield is likely to be higher in the future when interest rates peak. This is because bond prices tend to move in the opposite direction of interest rates. When interest rates rise, bond prices fall. Until interest rates stabilize, total returns will be limited.
↑ BND Expenditure Report
Expenses are one area in which ETFs in general and Vanguard in particular have a good track record. This is one area of low expense ratios. BND's expense ratio is a very low 0.03%. In other words, if you keep $100 in a BND balance for one year, Vanguard charges you only 3 cents. For $1,000, it's 30 cents. And that's for one year, it's a really inexpensive investment.
↑ Conclusion
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 more risk:
- 1st risk is credit risk. The longer the maturity of the bond, the longer the borrower must remain solvent.
- 2nd risk is interest rate risk. As mentioned earlier, bond prices have an inverse relationship to interest rates.Higher interest rates mean lower prices for bonds traded in the market. When interest rates rise, it means the potential for long-term bond prices to fall.
BND is not the most fun investment you will find. It's pretty boring. But it does have a place in diversified investment portfolios. BND is on the lower end of the risk spectrum. However, the bonds held in the fund are not guaranteed.
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