It’s safe to say that bonds have failed to provide a real investment case for much of the past 20 years.
After the 2008 financial crisis, the Federal Reserve cut interest rates to 0%. Yields on short-term bond funds fell to almost zero. Long-term bond funds are still able to generate yields around 2%, but they are no longer the source of income they once were.
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Any attempt to raise interest rates will hurt stock prices. This dynamic peaked in 2022, when inflation jumped to around 9% and the Fed was forced to raise interest rates sharply, while Vanguard Total Bond Market ETF (NASDAQ: BND) dropped by nearly 20%.
Today, conditions have improved greatly. Long-term yields have stabilized, and the fund’s 4.2% yield makes it once again part of a diversified portfolio.
If you’re looking to add broad bond market exposure to your portfolio to reduce overall risk and increase income, the Vanguard Total Bond Market ETF remains one of the best options for doing so.
This ETF tracks Bloomberg U.S. Total Float Adjusted Index. It is designed to invest in a broad range of U.S. investment grade, medium-term government bonds, corporate bonds and mortgage-backed securities (MBS). Essentially, it is a one-stop shop for the fixed income market.
Currently, the portfolio consists of approximately 68% government securities, roughly split between 49% Treasuries and 19% MBS. The remainder is primarily corporate bonds, with smaller allocations to other credit types.
Some would argue that an allocation of nearly 70% to U.S. government securities is too high for a diversified portfolio. To be honest, I’d rather see more corporate bond exposure here. something like this Vanguard Corporate Bond ETF You can add here to tilt the exposure slightly. But overall, the current allocation to total bond market ETFs works well for a long-term portfolio.
What the Vanguard Total Bond Market ETF does particularly well is provide complete bond market coverage without any undue tilt that could significantly alter the overall risk/reward profile.
By focusing on investment-grade securities with medium-term remaining maturities, you avoid the additional risk associated with junk bonds and overly interest-rate sensitive long-term bonds. By shooting straight into the middle, you get a blended fixed-income portfolio that maintains high quality and controls interest rate risk.
