The fixed-income landscape has undergone a dramatic transformation over the last twenty-four months, leaving many investors questioning how to best position their portfolios for a shifting interest rate environment. At the center of this debate are two of the most popular instruments in the bond world: the Vanguard Total Bond Market ETF (BND) and the Vanguard Intermediate-Term Treasury ETF (VGIT). While both funds offer low-cost exposure to high-quality debt, the structural differences between them can lead to significantly different outcomes for a long-term retirement strategy.
BND represents the broader approach to fixed income. It tracks the Bloomberg U.S. Aggregate Float Adjusted Index, providing exposure to a vast array of taxable investment-grade bonds. This includes not only U.S. Treasuries but also government-backed mortgage securities and corporate bonds from some of the largest companies in the world. The primary appeal of BND is its diversification. By holding corporate debt, the fund typically offers a higher yield than a pure Treasury fund, as investors are compensated for taking on the slight credit risk associated with private enterprise. Historically, this has allowed BND to outperform during periods of economic stability when corporate spreads remain tight.
However, the inclusion of corporate debt means that BND is not an entirely risk-free asset. During severe market panics, corporate bonds can lose value alongside stocks, potentially reducing the hedging benefit that many investors expect from their bond allocation. This is where VGIT offers a distinct alternative. VGIT focuses exclusively on U.S. Treasury bonds with maturities between three and ten years. Because these are backed by the full faith and credit of the U.S. government, they are considered the safest assets in the world.
In times of extreme market volatility, Treasuries often benefit from a flight to quality. When equity markets tumble, investors tend to rush into the safety of government debt, driving up prices. Because VGIT is composed entirely of these instruments, it often serves as a more effective ballast for a portfolio during a recession or a stock market crash. Furthermore, the interest earned on VGIT is generally exempt from state and local taxes, a factor that can significantly narrow the net yield gap between it and BND for investors living in high-tax jurisdictions like California or New York.
Interest rate risk is another critical factor to weigh when choosing between these two giants. Both funds occupy the intermediate-term space, meaning they are sensitive to fluctuations in the federal funds rate. If the Federal Reserve raises rates, the price of existing bonds in these funds will fall. Conversely, if rates decrease, both funds stand to gain. Because their durations are relatively similar, the price volatility resulting from interest rate movements will be comparable, though BND’s exposure to corporate credit adds a second layer of risk that VGIT simply does not have.
For most investors, the decision comes down to their specific goals and tax situation. Those seeking the highest possible monthly income within the investment-grade space may find BND more attractive due to its corporate bond component. It offers a one-stop-shop solution for bond exposure that covers almost every corner of the taxable market. On the other hand, investors who are primarily concerned with capital preservation and portfolio protection during a downturn may prefer the purity of VGIT.
The current economic climate adds a layer of complexity to this choice. With inflation showing signs of cooling and the Federal Reserve signaling a potential end to the aggressive hiking cycle, intermediate bonds are looking more attractive than they have in over a decade. Whether one chooses the broad diversification of BND or the government-backed security of VGIT, the return of meaningful yields to the bond market is a welcome development for savers and retirees alike. Ultimately, both funds remain top-tier choices that exemplify the low-cost, high-efficiency philosophy that has made Vanguard a leader in the ETF space.
