Vanguard to Launch Seven New Bond Index Funds and ETFs

Vanguard will add to its lineup of traditional open-end bond index funds and ETFs later this year with three new funds tracking broad benchmarks for government bonds, three tracking broad benchmarks for corporate bonds, and one new fund aping a mortgage-backed securities index.

The fund launches, which Vanguard announced Tuesday, will expand the family's passive fixed-income stable of ETFs and regular funds to 12 each. Like all of Vanguard's ETFs, the new offerings will be share classes of the open-end funds. The new funds also mark Vanguard's first foray into stand-alone government, corporate, and MBS sector index funds. The traditional mutual fund shares of the new funds, however, likely will be off-limits to most retail investors because the offerings will require a $1 million minimum investment. That's a higher minimum investment than the $100,000 Vanguard requires for its open-end equity sector index funds.

The new funds include Vanguard Short-Term Government, Intermediate-Term Government, Long-Term Government, Short-Term Corporate, Intermediate-Term Corporate, Long-Term Corporate, and Mortgage-Backed Securities. They all will track Barclays Capital indexes of varying duration in their respective sectors. The ETF and Signal share classes, or traditional mutual fund share classes, will charge an expense ratio of 0.15%. A separate institutional traditional mutual fund share class with an even higher $5 million minimum investment will offer a 0.09% expense ratio.

Proposed New Vanguard Index Fund/ETF Index ETF and Signal Class Expense Ratio MF Cat Average Exp Ratio ETF Cat Average Exp Ratio Short-Term Govt Bond BarCap U.S. 1-3 Govt 0.15 0.88 0.19 Int-Term Govt Bond BarCap U.S. 3-10 Govt 0.15 1.03 0.36 Long-Term Govt Bond BarCap U.S. 10+ Govt 0.15 0.92 0.42 Short-Term Corp Bond BarCap U.S. 1-5 Corp 0.15 0.90 0.20 Int-Term Corp Bond BarCap U.S. 5-10 Corp 0.15 0.96 0.21 Long-Term Corp Bond BarCap U.S. 10+ Corp 0.15 0.87 0.15 Mortgage-Backed Sec. BarCap U.S. MBS 0.15 1.03 0.36

 
These fees are significantly cheaper than average expense ratios for the funds' and ETFs' respective categories. But the fees just match or come in a little higher than the expense ratios of some ETFs from iShares and SPDR tracking different indexes but vying for the same turf in the same categories. For example, the  iShares Barclays 1-3 Year Treasury Bond (SHY), which has already been on the market for seven years, and the  iShares iBoxx $ Investment Grade Corporate Bond (LQD), one of the largest taxable bond ETFs on the market, both charge 0.15%. The  SPDR Barclays Capital Intermediate-Term Treasury (ITE) levies a 0.14% fee. Vanguard's MBS ETF, however, will be 5 to 10 basis points, or hundredths of a percent, cheaper than iShares Barclays MBS Bond (MBB) and SPDR Barclays Capital Mortgage Backed Bond (MBG), which cover similar territory.

So, the Vanguard funds and ETFs will be diversified in the sectors they track and competitive on price, as expected. Still it's interesting Vanguard, which has a history of drastically undercutting its mutual fund and ETF competitors on price, didn't come out with even lower ETF expense ratios.

The new funds also come as investors have been flocking to Vanguard's fixed-income index and actively managed funds and ETFs. On the open-end side  Vanguard Short-Term Investment-Grade (VFSTX),  Inflation-Protected Securities (VIPSX),  GNMA (VFIIX),  Total Bond Market (VBMFX),  Intermediate-Term Investment-Grade (VFICX), and  Short-Term Tax-Exempt (VWSTX) have all been among the industry's top 20 sellers year-to-date through the end of July, according to Morningstar fund flow data.  Vanguard Total Bond Market ETF (BND) also has been a top 20 seller in the ETF market year-to-date, while  Vanguard Short-Term Bond ETF (BSV) has been a top 25 seller, according to Morningstar data.