Vanguard Climbs the Bond Ladder With Latest Launch

Vanguard’s finally climbing its way up the ladder.

The world’s second-largest issuer filed this week to launch 10 corporate bond ladder ETFs, years after products from top competition like BlackRock and Invesco. The new defined-maturity funds package bonds with similar face values and end dates into a single product and give advisors a way to plan for major life events, like paying for college or funding retirement. The Vanguard funds have maturity dates between 2027 and 2036 and will look to undercut the competition on price at just 8 basis points, according to a filing with the SEC. It’s the latest addition in a flurry of new products launched this year under new-ish CEO Salim Ramji, and will enter a busy space where competitors have already planted flags, billboards and possibly lawn furniture. 

“Vanguard pioneered the index fund, but they have rarely been first movers on ETFs,” said Jeff De Maso, editor of the Independent Vanguard Adviser. “Generally, they’ve been late to the game, and ultimately won through lower fees and their reputation.”

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Bond ladders have advantages over traditional funds because they provide a consistent cash flow over time. They can also give clients the “peace of mind” that comes with seeing them as a holding in their brokerage account, and knowing they’re going to mature at par, even if interest rates rise and bond prices dip, De Maso said. 

Scott Van Den Berg, CFP, of Century Management said the real joy is lining them up with future cash needs. For example, Van Den Berg built ladders to help clients bridge the gap between retirement and the start of Social Security. “Investors aren’t familiar with how individual bonds trade or how they behave, so the simplicity of a laddered ETF will be appealing,” he said. “They give us the precision, flexibility, and confidence that each rung of the ladder is doing exactly what the client needs it to do.”

With Vanguard entering the fray, costs will almost surely come down and help investors avoid the sometimes opaque pricing found in the individual-bond market, said Mike Casey of AE Advisors. Vanguard will face entrenched competition:

• BlackRock’s iShares has a suite of iBonds funds covering corporates, Treasuries, TIPS, munis and even junk bonds that first debuted in 2010. 
• Invesco added nine new target-maturing municipal bond funds to its BulletShares suite in 2019. 

Step by Step. Bond ladders are also practical ways to manage interest-rate risk and bring structure to the fixed-income side of a portfolio, said Casey. But building them using an individual-bond approach requires a lot of time and attention to maintain spreads and rebalance or reinvest proceeds. That’s why the new wave of ETFs could be game-changing. “The emerging competition, now including Vanguard, should further compress expense ratios and improve liquidity, which ultimately benefits everyone,” Casey said.