Vanguard Makes Bigger Push Into Active Bond ETFs

Susan Dziubinski: Vanguard launched a few actively managed bond funds in 2023. Why do you think active bond management was something that Vanguard decided specifically in 2023 that this was the time for them to do?

Daniel Sotiroff: To be a little bit more precise, we’re in the throes of this actually happening. Just this morning I saw the final prospectus on the two actively managed bond ETFs that you’re referring to: Vanguard Core Bond ETF VCRB and Vanguard Core-Plus Bond ETF VPLS. The final prospectus came out today. So, we should probably time-stamp this as a Dec. 6 in the afternoon we’re recording in the studio here. They’re expected to be live any day now.

Why is it a bigger push for them? I think it’s more of an industrywide thing. We’ve heard some of their competitors have also said that. I think when you look at just what’s happened, we’ve been in the zero-interest-rate environment for 10 or 12 years. We’re finally coming out of that over the last two or three years. So, there are actually some interest rates attached to these things. So, it makes a little bit more sense. There’s also an appetite for income. Dividend funds are very popular, and fixed income for a long time before you got into the zero-interest-rate environment fulfilled some of that. It’s sort of a fixed coupon that you can rely on for some income. I think for both those reasons, plus equity has been very picked over with strategic data and ESG and everything we’ve had over the years. If you’re looking to innovate, I think fixed income is sort of the final frontier at this point.

Dziubinski: I know you just looked at these prospectuses, so maybe you can’t even answer this question, but I’m still going to ask you. With what you’ve seen in these prospectuses, do we have any insights into who the managers are, do they manage other funds? I know they’re not even out yet, so we can’t rate them, but like, what would be some just preliminary things that maybe struck you or you noticed?

Sotiroff: I think in general, it looks like good stuff. The managers are Vanguard managers who are on other funds. So, we have a little bit of familiarity with them. I think the bigger thing here is just how does Vanguard manage fixed income. They’ve long gone in the direction of just giving you broad access to the bond market or a segment of the bond market and then taking some opportunistic active risk around the edges where they think they can add a little bit of value. They tend to be very low-fee, so there’s a very low hurdle, and because of that, they don’t have to take on a ton of risk in order to outperform. So, you get a little bit more of a conservative portfolio, but the potential for outperformance is still there because they’re relying on that low fee as really the catalyst to actually drive the performance. And that seems to be very much embedded into both of these ETFs that they’re coming out with. So, Vanguard Core Bond ETF that I mentioned, the expense ratio on that is 10 basis points. The Core-Plus Bond ETF is 20 basis points. Really, the difference that you’re looking at there, I think, is going to be the exposure to the high-yield bond market. So, Core Bond, I think in the prospectus said about 5% or less in high-yield bonds. Core-Plus, obviously, by its name is going to take on a little bit more. So, a little bit higher risk/reward with that one, depending on what you want, but just based on the name, these sound like pretty broad core-type bond holdings that could easily complement a very diversified portfolio at the end of the day.

Dziubinski: Outside of these actively managed bond funds, did Vanguard launch any new mutual funds or ETFs in 2023 that you think are notable?

Sotiroff: One that just came out recently was International Dividend Growth Fund VIDGX. That’s the international cousin of Dividend Growth that we were just talking about before. Peter Fisher is managing that fund, who is going to be taking over Dividend Growth VDIGX from Donald Kilbride. So, you see some continuity there. I haven’t really looked into it. It just came out last month but expect a very similar process just applied to international markets there.

Watch the full conversation between Susan Dziubinski and Daniel Sotiroff in “What’s in Store for Vangaurd’s Funds, ETFs, and More in 2024.”