VCRB: An Active ETF Alternative to BND

The article discusses Vanguard Total Bond Market ETF (BND), the largest fixed income ETF. BND is a passive ETF that follows the Barclays Capital Aggregate Bond Index. The article also mentions VCRB, an active ETF that aims to replicate the performance of BND. The article provides an overview of BND's characteristics and performance, as well as the advantages and disadvantages of active versus passive ETFs.

Title: Vanguard Total Bond Market ETF (BND) and VCRB: A Comparative Analysis

The Vanguard Total Bond Market ETF (BND) is a well-established passive ETF, known for its broad exposure to the U.S. investment-grade bond market. With assets under management (AUM) exceeding $350 billion, BND is a cornerstone for many investors seeking reliable income and diversification. However, for those who prefer an actively managed approach, VCRB (Vanguard Core Bond ETF) offers an alternative.

BND: The Largest Fixed Income ETF

BND follows the Bloomberg U.S. Aggregate Bond Index, which includes a wide range of investment-grade bonds. The fund's composition is heavily weighted towards U.S. government bonds and agency obligations, making up 67% of the portfolio. The remaining 30% is allocated to corporate bonds, with the rest comprising ABS securities, sovereign bonds, and municipal bonds. The fund's duration is 5.8 years, and its 30-day SEC yield is 4.44%. Despite its passive nature, BND offers a high level of diversification and liquidity, with an average daily trading volume of over 7 million shares.

VCRB: An Active Alternative to BND

VCRB, an actively managed ETF, aims to replicate the performance of BND but with a more dynamic approach. The fund's portfolio consists of over 1900 bonds, including U.S. Treasuries, mortgage-backed securities, and corporate bonds. The portfolio yield to maturity (YTM) is 4.8%, with a duration of 6 years. Unlike BND, VCRB has a higher turnover rate of 425%, indicating more active trading. The fund's expense ratio is 0.1%, which is slightly higher than BND's 0.03%.

Performance Comparison

Both ETFs have shown consistent performance, but VCRB has outperformed BND in the past two years. Data from YCharts shows that VCRB has outperformed BND by more than 140 basis points (bps) since the start of 2024. This outperformance can be attributed to VCRB's active management, which allows it to make more timely adjustments to the portfolio.

Macro Economic Considerations

The performance of both ETFs is closely tied to intermediate rates, particularly the 5-year point. Intermediate rates are highly correlated to Fed Funds rates, and VCRB's performance is expected to improve if Fed Funds move lower. Given the current high net level in rates, a move to 3% would translate into a 6% performance for VCRB.

Active vs. Passive Management

The choice between active and passive management depends on an investor's risk tolerance and investment goals. Passive ETFs like BND offer lower costs and higher liquidity but may underperform during periods of market volatility. Active ETFs like VCRB, on the other hand, can provide better performance but come with higher fees and more risk. For investors seeking a balance between risk and return, VCRB may be a more attractive option.

Conclusion

Both BND and VCRB have their merits, and the choice between them depends on individual investment preferences. BND is a reliable option for those seeking a passive, low-cost investment in the bond market. VCRB, with its active management and slightly higher performance, may be more suitable for investors looking to outperform the market. In today's macro environment, where intermediate rates are high and correlated to Fed Funds, VCRB's active approach could provide a significant advantage.

References

[1] https://seekingalpha.com/article/4793919-vcrb-active-etf-take-on-bnd
[2] https://seekingalpha.com/article/4792335-bnd-a-portfolio-cornerstone