Total Bond Fund

What Is a Total Bond Fund?

A total bond fund is a mutual fund or exchange-traded fund that looks to imitate a broad bond index. A total bond fund claims numerous securities across a scope of maturities, from both public and private sectors. The most common index utilized as a benchmark is the Barclays Aggregate Bond Index, which catches Treasury bonds, corporate bonds, municipal bonds and high-grade mortgage-backed securities.

How a Total Bond Fund Works

Total bond funds might invest in bonds of comparative maturity, class, and rating to duplicate an issue that isn't accessible for purchase by the fund. These limitations exist in view of the diversity and relative illiquidity of the bond markets compared with equities markets. It is important for a total bond fund to have a comparative interest rate and maturity to the base index.

Total bond fund portfolios really have a bit more freedom in their security selection than a total stock fund does. Since individual bond issues have less liquidity than stocks, a few funds need to sidestep certain issues that are in the benchmark index while picking different bonds that are not in the index.

Many total bond funds have a small allocation, around 20% of assets, from which bonds can be picked at the carefulness of the managers and held in assets outside the Barclays Index, for example, international bonds, derivatives and lower-rated corporate paper. This permits fund managers a chance to invest in some noncorrelated assets while keeping the overall risk profile of the fund inside a similar reach as the Barclays Index.

The main risk metrics to keep close to the index are the maturity, or all the more explicitly the weighted average maturity, as well as the duration, or sensitivity to changes in interest rates.

Vanguard Total Bond Market Index

The Vanguard Total Bond Market Index is intended to give broad exposure to U.S. investment-grade bonds. Mirroring this goal, the fund invests around 30% in corporate bonds and 70% in U.S. government bonds of all maturities (short-, intermediate-, and long-term issues). As of June 2022, the fund had a 10-year annualized return of 1.34%.

Likewise with other bond funds, one of the risks of the fund is that expansions in interest rates might prompt the price of the bonds in the portfolio to diminish — estimating the fund's NAV lower. Since the fund invests in all portions and maturities of the fixed income market, investors might consider the fund their core bond holding.

Features

• A total bond fund tracks the performance of its underlying index, which thusly screens the whole bond market.
• Investing in a total bond fund gives investors a similar exposure to the bond market as more traditional bond investments permit, however offer an exceptionally liquid option in what is traditionally a very illiquid sector.
• One of the most famous total bond funds is offered by Vanguard, and is called the Vanguard Total Bond Market Index Fund.
• For total bond funds to work, they need to have a comparative maturity to the bonds in the underlying index.