Navigate uncertain times with our Core and Core-Plus Bond active ETFs

Executive summary:

• Advisors may now access two new active fixed income ETFs from Vanguard: Core Bond ETF (VCRB) and Core-Plus Bond ETF (VPLS).
• VCRB seeks to provide broadly diversified exposure predominantly to U.S. investment-grade bonds.
• VPLS enjoys a much wider opportunity set for active management because it can access more below-investment-grade securities and sectors not found in the Bloomberg U.S. Aggregate Float Adjusted Index.

Advisors may now access two new active ETFs, with each designed to serve as the potential centerpiece of client portfolios.

VCRB and VPLS, managed by Vanguard Fixed Income Group, are intended to provide clients with single-fund fixed income holdings that are broadly diversified across a range of sectors, credit qualities, and maturities.

“For more than 40 years, Vanguard has delivered strong investment outcomes for our active fixed income investors across an expanding range of strategies,” said Sara Devereux, global head of Vanguard Fixed Income Group. “These new ETFs will offer investors access to Vanguard’s world-class active investment talent at a low cost and with the convenience and flexibility offered by the ETF structure.”

Why active for broad bond market exposure?

VCRB and VPLS can be total portfolio solutions. Fixed income benchmarks underrepresent the universe of investable securities, so fixed income can be ripe ground for active managers to add value by sourcing from the full market.

Active managers can do this either through primarily higher-credit-quality bonds in a core strategy, or in a more flexible core-plus strategy that offers some exposure to bonds of lower credit quality.

VCRB and VPLS

VCRB and VPLS both provide actively managed exposure to the U.S. fixed income market. VCRB has a higher-quality bias, as it focuses primarily on investment-grade corporate bonds, Treasuries, and agency mortgage-backed securities, with only selective exposure to high-yield, emerging markets, and non-U.S. corporate bonds. It’s benchmarked against the Bloomberg U.S. Aggregate Float Adjusted Index (known as the “Agg”).

VPLS, which is benchmarked against the Bloomberg U.S. Universal Index (known as the “Universal”), also provides exposure to U.S. government debt and investment-grade corporates, but it has a wider investable universe than VCRB, with greater flexibility to invest in high-yield corporate and emerging markets bonds. Vanguard’s active team will seek to add value above the ETFs’ respective benchmarks through a mix of fundamental-research-driven security selection, sector allocation, and targeted duration and curve positioning.

Vanguard’s active team also manages Vanguard Core Bond Fund, launched on March 28, 2016, and Vanguard Core-Plus Bond Fund, launched on October 25, 2021.

Separate and distinct

VCRB and VPLS share the benchmarks, management teams, and expense ratios of the Admiral share classes of their respective mutual fund counterparts. However, they are separate and distinct products. Natural differences in total asset size, client cash flow activity, and other factors will result in differences in fund holdings and, in turn, modest differences in fund performance between the corresponding ETFs and mutual funds, particularly over shorter time periods.

The Bloomberg U.S. Universal Index tracks more of the available issuance of the U.S. fixed income market

    Sources: Bloomberg and Aladdin, as of September 30, 2023.

Taking a universal approach

Vanguard’s approach is true to label, which means straightforward product design and benchmark selections that best represent the key risk exposures in each fund or ETF.

In accordance with that approach, Vanguard considers the Universal to be a better benchmark than the Agg for a core-plus strategy. Conversely, many other active core-plus managers use the Agg as a benchmark despite taking credit risk similar to or greater than the riskier Universal.

The Universal has more comprehensive exposure to the bond market. In addition to the exposures of the Agg, the Universal includes U.S. high-yield corporates, greater exposure to structured products and emerging markets, and other less-mainstream bond sectors. These sectors have more credit risk, but often less interest rate risk, and can be slightly less liquid. They also tend to offer high yields and greater opportunity for selection and allocation decisions for active managers.

Looking at the exposures covered by the Agg and the Universal can help advisors understand the differences between core and core-plus products to determine how to use them in client portfolios.

When portfolios are defensively positioned, Vanguard Fixed Income Group’s active investing philosophy calls for the core-plus active portfolio managers to hold down allocations to some of the “plus” sectors, and mainly focus on adding value through security selection.

When Vanguard Fixed Income Group sees the market offering more opportunity, the active managers are likely to have larger allocations to credit sectors, seeking to generate value from both the allocation and security selection.

A tale of two benchmarks

    Source: Bloomberg Fixed Income Index Methodology, published September 29, 2023.

Learn more about our active bond ETFs

Notes:

Vanguard Core Bond ETF and Vanguard Core-Plus Bond ETF are not to be confused with the similarly named Vanguard Core Bond Fund and Vanguard Core-Plus Bond Fund. These products are independent of one another. Differences in scale, certain investment processes, and underlying holdings between the ETFs and their mutual fund counterparts are expected to produce different investment returns by the products. To obtain a prospectus for Vanguard Core Bond Fund or Vanguard Core-Plus Bond Fund, please call 800-662-7447.

For more information about Vanguard funds or Vanguard ETFs, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

All investing is subject to risk including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. Past performance is no guarantee of future results.

Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments.

Investments in bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets.

High-yield bonds generally have medium- and lower-range credit-quality ratings and are therefore subject to a higher level of credit risk than bonds with higher credit-quality ratings.