What’s Inside the Vanguard Total Bond Index Fund?

The Vanguard Total Bond Market Index Fund is designed to track the entire spectrum of US bonds (well, those that are publicly-traded, taxable, and investment-grade). It is the second-largest bond fund out there, with $160 billion in assets and behind only the PIMCO Total Return Fund. It is available to retail investors as a mutual fund (VBMFX/VBTLX) or ETF (BND). If you own a Vanguard Target Retirement or LifeStrategy fund, you own some version of this fund. Let’s take a closer look.

Vanguard founder Jack Bogle wrote an article called The Bond Index Fund which talks about how the Vanguard Total Bond Index fund got started and its subsequent performance:

It’s now 25-year lifetime rate of annual return averaged 6.9 percent, a nice margin of 1.2 percentage points over the average 5.7 percent rate of return of its taxable peers. That superiority comes despite the Fund’s assuming far less credit risk, for the fund (and the bond market index itself) typically hold more than 70 percent of assets in securities backed by the U.S. Treasury and its agencies, including mortgage pass-through certificates. Compounded, the appreciation of a $10,000 investment made at the close of 1986 was remarkable: average actively-managed bond fund $29,900; Vanguard’s passively-managed bond index fund, $42,600—an enhancement in profit of more than 40 percent. This stunning advantage once again reaffirms the timeless truism: Never forget either the magic of long-term compounding of returns, nor the tyranny of long-term compounding of costs.

You have to admit, this historical growth chart looks pretty good:

So, what’s inside this bond juggernaut? For that, we look at the popular benchmark Barclays US Aggregate index, which started in 1986. As it is a market-cap weighted index, the composition shifts constantly over time. The iShares blog has an illustrative chart:

What do all those acronyms mean?

  • US Treasury. Bonds issued and backed by the US government, including Treasury notes and bonds. (Nominal only, TIPS are not included.)
  • US MBS. Mortgage-backed securities, backed by residential mortgages and packaged by Ginnie Mae, Fannie Mae, Freddie Mac, and others including private issuers.
  • US Credit. Securities issued by corporations with investment-grade ratings from the major ratings agencies.
  • US Agency. Securities issued by a Federal Agency or a government-sponsored enterprise like Fannie Mae or Freddie Mac. These are either explicitly or implicitly backed by the US government.
  • CMBS. Commercial Mortgage-backed Securities, backed by commercial property mortgage loans.
  • ABS. Asset-backed Securities, backed by things such as consumer auto loans, credit card debt, and home equity loans.

(References: Wikipedia, Bogleheads Wiki)

Circling back to the Bogle article, he points out that this index is again very heavily weighted towards US government-backed bonds at over 70%. These days, this means the Total Bond Index Funds a really low yield of about 1.6% (as of October 2012). He suggests that we can’t ignore the risk of rising rates and we should look into a new Total Corporate Bond Index Fund which would include all the maturities and have an estimated yield of about 3.0%. I find this interesting, as I myself am also avoiding Treasury bonds due to their low yields. In this Reuters article about his personal portfolio, Bogle shares that he holds Vanguard Intermediate-Term Tax-Exempt (VWITX), which currently has the same yield of about 1.6% – but exempt from Federal income taxes! So basically, he’s saying it’s not a bad idea over the long-term to hold a low-cost, diversified fund of investment-grade bonds with their higher yields. Interesting.

Disclosures: I don’t own any Total Bond Index. I do own Vanguard Intermediate-Term Tax-Exempt and Vanguard Limited-Term Tax-Exempt funds as I’m out of tax-deferred space for my bonds. I also own PIMCO Total Return because that’s the cheapest bond fund available in my 401k; at least I get access to the cheaper institutional shares.


  1. I also own PIMCO Total Return in my 401k, but I have fidelity brokerage link available at no additional cost. Do you think its a good idea to invest in total bond index fund instead of PTTRX.

  2. $10K to $42K? Nope, after taxes & inflation, around $15K

  3. @jj – I don’t know about just $15k – you should keep your bonds in tax-deferred if possible – but the point is about relative performance with its peers. By simply being passive, making no picks, and being low-cost, Total Bond beat the average handily and is only behind Bill Gross in assets. While Total Bond can just stay passive and follow the market, Gross is now charged with navigating a $250 billion bond fund. It’ll be a tough task, and now that I own PIMCO I’ll have to root for him!

  4. @raj – Well, it depends on your expense ratio and if you think Bill Gross the manager can beat the market by that expense ratio. Fidelity has some cheap bond index funds


    If you have access to the Fidelity Spartan U.S. Bond Index Fund – Investor Class (FBIDX) or Spartan U.S. Bond Index Fund – Fidelity Advantage Class (FSITX) with no transaction fees, then that bond fund also tracks the Barclays U.S. Aggregate Bond Index at a low-cost. If you get charged a transaction fee for the Vanguard fund (which you probably do) or to buy the Vanguard ETF (ticket BND) and you want to go with a broad index fund, you might consider going with the Fidelity Spartan U.S. Bond Index Fund.

  5. I have not subscribed that much to the asset allocation plans that many people support, with a sizable percentage of my investments being in bonds, on the theory that even at 60, one still likely has another 20+ years of investment needs, so I am probably much lower on bonds that most people who read this blog.

    But at 50, I have started to consider moving some money into bonds, but I really don’t know in the current environment. Bonds pay almost nothing now, and with the rates pretty much rock bottom, they have no where left to go than up – and everyone knows what happens to bond prices when interest rates go up. It just seems like a really bad time to move into bonds.

  6. It’s actually a common misconception that bond prices fall *because* interest rates rise. Interest rates rising is actually defined by bond prices falling. This is because a bond’s price and a bond’s yield to maturity automatically define each other. So a change in one automatically defines a change in the other.

  7. I wouldn’t call it a “misconception”, but more a short hand. As you said, a change in one automatically defines a change in the other, and since for most people what is visible is the current interest rates, that’s what is most often spoken of.

  8. US treasury is borrowing record amounts of money at record low interest rates – total bond would invariably skewed towards treasury bonds. It would also be very sensitive to rising interest rates. I am not comfortable with that.

    In Gross I trust and almost all of my fixed income holdings are PIMCO funds.


  9. Cabron James says:

    fw: check this link of world sovereign 10 yr bond yields.

    on the notion “the US Treasury yields are so low, they can NOT possibly go lower, they MUST rise”.

    I’m not saying you all are wrong that bond yields must rise. I’m saying that is it mostly unknowable, per the Harry Browne Permanent Portfolio type of thinking that you can’t reliably predict the future, so it’s best to pick an Asset Alloc that will do well against wildly different economic conditions. I think that advice is useful to all, even those using a non-Perm Port type of Asset Alloc (Bogleheads’ 50% global stock indices/50% Bond Index seems a decent alternative on this count).

    Notice, iirc, that the “professional” Bill Gross Epically Failed shorting 30 yr US Treasuries, only for the 30 yr UST to go up ~30% in 2011 & be close to the best asset class in 2011. Incidents like the Bill Gross Fail lead me to believe the data shows the Browne was correct with his Unpredictable notion.

    Notice per the link several sovereign currency nations (eg not the Euro or some nation that pegs to another nation’s currency like China/Ecuador to USD, etc) have yield MUCH LOWER than the US’s 1.668%. IIRC Japan has a 0.758% yield with 230% debt-to-GDP ratio, over double the US’s 103% debt-to-GDP ratio. Switzerland is 0.510%.

  10. Jenna, Adaptu Community Manager says:

    What if you started in 2012? Where would it be in 10 years?

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