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Vanguard Long-Term Bond ETF (NYSEARCA:BLV) is an exchange traded long term bond fund launched and managed by The Vanguard Group, Inc. This ETF was formed on February 2, 2006 and is domiciled in the United States. The fund invests in rated (BBB- or above rating by S&P) long term (maturities of 10 years or more) government securities, corporate and international dollar-denominated bonds. This ETF seeks to track the performance of the Bloomberg Barclays U.S. Long Government/Credit Float Adjusted Index.
Vanguard Long-Term Bond ETF is a small-cap bond ETF with an asset under management (AUM) of $5 billion, which is invested in over 2883 securities. This ETF has an extremely low expense ratio of 0.05 percent. The bonds in this ETF are selected from securities listed in Bloomberg Barclays U.S. Long Gov/Credit Float Adjusted Index by employing representative sampling methodology. In representative sampling, bonds are selected in such a way that it reflects the characteristics of its benchmark index.
Bonds issued by the U.S. treasury represent about 46 percent of BLV’s portfolio. These bonds are safe as they are guaranteed by the U.S. government. 51 percent of the portfolio consists of investment-grade corporate bonds, which have a very low default rate of only about 0.10% per year (based on the 32-year period measured). On the other hand, the default rate for below-investment-grade (high yield) bonds was quite high at 4.22%.
The corporate default rate measures the failure of the bond to make scheduled interest payment or default in making principal repayments in the prior 12 months. This default rate calculates the default percentage of issuers in a given fixed-income asset class. A high or rising default rate implies how poor a particular asset category is, and investors are advised to stay away from such securities. A low or falling default rate motivates investors. Default rates tend to be lowest during times of economic growth, and highest during times of economic stress.
Vanguard Long-Term Bond ETF paid steady monthly dividends since May 2007, almost from the very beginning. BLV has a current yield (TTM) of 3.87 percent, and has also recorded an annual average yield of almost 4.36 percent over the past 10 calendar years. During this period annual yield has ranged between 3.4 percent to 5.8 percent.
BLV’s stock had recorded poor growth, mostly negative since its inception. Its stock price fell by 15.7 percent over the past year, 7.5 percent over the past three years, and 9 percent over the past five years. Though it has been able to generate positive growth over the long run, that still is disappointing. An 11percent price growth over more than 16 years, and 8 percent negative growth in the past 10 years is surely not helpful to attract investors. Since its inception, BLV price has recorded a compounded annual growth of 0.65 percent only.
When compared to S&P 500, this diversified bond ETF has really performed poorly. S&P500 had a positive growth of 59 percent and 105 percent during the past three and five years respectively. Being highly concentrated on US treasury notes and rated bonds with higher duration has not worked well for Vanguard Long-Term Bond ETF, at least in terms of price growth. The fund also faces considerable interest rate risk given its long average duration to maturity.
The COVID-19 pandemic also had a major impact on fixed income securities. In late February, the overall bond/fixed income yield started declining amid growing concerns about the economic effects of the pandemic. An emergency rate cut of 50 basis points by the US Fed in early March 2020 accelerated the decline of 10-year yield. The yield dropped down to a record low of 0.32%, before rebounding.
However, the lower interest rates do provide some benefits. As the US Fed lowers the coupon rate on new treasuries, it subsequently makes older treasury securities with higher coupon rates more desirable. As the Us treasury rates set the trend, corporate bonds follow the same. For this reason, the investment-grade corporate bond market had functioned well during the global financial crisis.
During COVID-19 pandemic, the bond market failed to perform and witnessed a sharp fall in the prices of investment-grade corporate bonds, proportionately more than for high-yield bonds. This was even more surprising because high-yield bonds are riskier, less liquid, and more sensitive to an economic recession. A probable reason might be the “structural changes in the financial sector since the global financial crisis (which) have dramatically increased the demand for liquidity by corporate bond investors beyond the ability of the markets to provide it in stress events”.
A strong argument can be built against the investability of Vanguard Long-Term Bond ETF. As there is hardly any price growth and a negative growth over the past 10 years, investors have to rely only on dividend income which has a historical yield of 3.4 percent to 5.8 percent. No doubt this yield is almost certain in the future, as the income is generated through the interest from US treasury and investment-grade corporate bonds. However, in absence of price growth, this return seems poor. There is also considerable interest risk involved in BLV’s portfolio.
Vanguard Long-Term Bond ETF invests mostly only on those bonds which have a maturity of more than ten years. 99% of BLV’s bond portfolio has a maturity over ten years. “The long term focus results in a weighted average maturity of 23.4 years and an effective duration of 16.3 years. The fund’s duration presents an enormous level of interest rate risk to investors. Should interest rates rise by 100 bps, the fund is at risk of losing around 16% of net asset value over that time period”.
However, a positive thing for Vanguard Long-Term Bond ETF is that it has little risk of default due to its investments in long-term U.S. treasuries and investment-grade corporate bonds. In my opinion the treasury yield will not change significantly from the current level. Also, the Federal Reserve will continue buying such investment-grade corporate bonds and U.S. treasuries, no matter what the economic scenario is.
As a result, the ETF’s price is expected not to go down beyond a point. Vanguard Long-Term Bond ETF reached its 52-week low on 19th April, 2022. There is no reason why this ETF should suffer further loss of any significant margin. Thus, if an investor’s aim is to be almost risk free and receive a stable dividend income, BLV is not a bad choice; as the ETF has little downside risk in the near term. Otherwise, for average to high risk bearing investors, Vanguard Long-Term Bond ETF is not a wise investment option, due to the absence of price growth and prevalent interest rate risk.
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