Bonds are boring yet necessary investments. They generate a low, fixed income return, providing a predictable stream of income. Bonds also help preserve capital, reducing a portfolio’s risk profile and volatility. Most financial advisors recommend that all investors allocate at least some of their portfolio to bonds, with that allocation rising as an investor approaches retirement.
There are lots of ways to invest in bonds. Exchange-traded funds (ETFs) are the simplest way to add some bond exposure to a portfolio. One of the best bond ETFs to buy is the Vanguard Total Bond Market ETF (NASDAQ: BND). Here’s why it belongs in almost any long-term portfolio.
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Broad exposure to high-quality bonds
The Vanguard Total Bond Market ETF is a great way to gain broad exposure to bonds. It tracks a broad, market-weighted bond index. This index measures the performance of U.S. dollar-denominated bonds issued by investment-grade borrowers, excluding inflation-protected and tax-exempt bonds. As a result, the fund holds a large portfolio of high-quality bonds. That makes it a relatively low-risk investment.
The fund currently holds 11,387 bonds. The bulk of its holdings are U.S. Government bonds (69.2% of the fund), issued by the U.S. Treasury (Treasury bonds) and other U.S. Government agencies (49.3%), or government mortgage-backed bonds (19.4%). The ETF also invests in bonds backed by commercial mortgages, those issued by public companies, and U.S. dollar-denominated bonds issued by foreign entities, including foreign governments.
A long-term income producer
The fund holds a mix of maturities. Around 45% of its holdings mature in five years or less, with the remainder maturing in five or more years. Overall, the fund has an average effective maturity of 8.1 years. Meanwhile, its holdings have an average yield-to-maturity of 4.6%. As a result, the ETF should provide a steady income stream over the long term.
Its higher allocation to bonds with maturities of five or more years makes it an ideal long-term holding. The fund also has a very low expense ratio of 0.03%. That adds to its long-term investment appeal as the ETF’s costs won’t have much impact on its returns.
A great bond fund for the long haul
Bonds play an important role in portfolio diversification and risk reduction. They do so by providing a fixed-income return that investors can bank on across market environments. That’s why investors should have some bond exposure in their portfolio. The Vanguard Total Bond Market ETF provides very broad exposure to high-quality U.S. dollar-denominated bonds. With a higher allocation to long-duration bonds and a low expense ratio, it can be a core, long-term bond holding in any portfolio.