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Vanguard Launches Its First Active Bond ETF

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What You Need to Know

  • The Vanguard Ultra-Short Bond ETF (VUSB) is essentially a clone of Vanguard's Ultra-Short Bond Fund.
  • State Street has launched an emerging markets USD bond ETF (EMHC), which invests in dollar-denominated EM bonds.
  • The actively managed Vanguard ETF has a 0.10% fee; the passive State Street ETF has a 0.23% fee.

A  day after Charles Schwab announced the launch of its first actively managed ETF, Vanguard debuted its first actively managed bond ETF.

The Vanguard Ultra-Short Bond ETF (VUSB), which is listed on the Chicago Board Options Exchange (Cboe), is similar to the company’s actively managed Vanguard Ultra-Short-Term Bond Fund, which launched in 2015.

Both funds invest in diversified portfolios of high-quality and medium-quality bonds, including government bonds and investment grade corporate securities with maturities of up to two years. Both funds also seek current income with limited price volatility along with preservation of capital and income streams, and both are managed by the Vanguard Fixed Income Group, specifically co-managers Samuel C. Martinez, Arvind Narayanan and Daniel Shaykevich.

But the new ultra-short bond ETF has a net fee of 0.10%, half the fee for Investor shares of Vanguard’s ultra-short bond fund, which requires a minimum $3,000 investment, and therefore a cheaper option for retail investors. Admiral shares of the ultra-short bond fund have a 0.10% fee but require a minimum $50,000 investment.

Kaitlyn Caughlin, head of Vanguard Portfolio Review Department, said in a statement that the new ETF’s strategy helps bridge “the gap between money market funds offering a stable share price and short-term bond funds, which are meant for longer investment time horizons.” In that way it is an option for investors to meet “anticipated cash needs” for a six- to 18-month period.

Dan Wiener, editor of The Independent Adviser for Vanguard Investors, says the new ultra-short term bond ETF, like Vanguard’s ultra short-term bond fund, “is a good substitute for cash.” From inception in February 2015 through the end of 2020, the bond fund returned 10.1% — close to double the 5.6% return of Vanguard’s Federal Money Market Fund (VMFXX).

State Street Launches Passive Emerging Markets Bond ETF

Vanguard isn’t the only giant asset manager to add a new bond ETF. State Street Global Advisors announced the launch of a passive emerging markets bond ETF with an expense ratio of 0.23%.

The SPDR Bloomberg Barclays Emerging Markets USD Bond ETF (EMHC) invests in U.S. dollar-denominated debt issued by sovereign and quasi-sovereign emerging market issuers. EMHC tracks the Bloomberg Barclays Emerging USD Bond Core Index, which includes bonds with a minimum par outstanding amount of $500 million, a remaining maturity of at least two years and an original maturity of greater than five years. The index excludes the lowest rated (CCC- or lower) and highest rated (AA- or higher) rated bonds and employs a 5% country cap, by amount outstanding.

State Street’s new emerging market bond ETF can provide investors more income than they can collect from U.S. bonds along with diversification benefits given the low historical correlation of emerging market bonds to other global bond sectors, according to State Street.

“Emerging market debt has seen solid growth over the last decade, however, we believe many investors may be under-allocated to this asset class,” said Sue Thompson, head of SPDR Americas Distribution at State Street Global Advisors, in a statement.

“EMHC meets demand from clients who are attracted to the benefits of emerging market debt but concerned about the potential impact of local currency depreciation,” said Noel Archard, global head of SPDR product at State Street Global Advisors.