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Understanding investment types

What are fixed income or bond funds?

Bond funds and bond ETFs offer greater diversification than individual securities as well as other benefits. Bond funds are similar to stock funds because they invest in a diverse selection of investments—but they hold fixed income securities instead of stock.
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Benefits of bond funds

Get higher income potential

Bond mutual funds and bond ETFs give your portfolio the opportunity to earn income that can compound over time to build wealth and help you pay for expenses.
 

Add stability to your portfolio

When included in a well-balanced portfolio, bond funds can help diversify your investments and generate income.
 

Help reduce your investment risk

Fixed income mutual funds and ETFs can contain hundreds—sometimes thousands—of bonds in a single fund. You get more diversification than owning just a handful of individual bonds.

How to choose a bond fund

There are a few questions to ask yourself when considering bond funds for your portfolio:
 

Am I investing outside of an IRA or other retirement account?

If you're in one of the highest tax brackets and investing outside of your retirement account, you may be able to reduce your tax exposure with a tax-exempt bond fund.

Find out if tax-exempt mutual funds are right for you

Cut your federal tax bill with a national tax-exempt fund. Get added state-tax savings if you live in:

  • California
  • Massachusetts
  • New Jersey
  • New York
  • Ohio
  • Pennsylvania

See a list of Vanguard tax-exempt bond funds
 

Do I want domestic or international bonds?

Investing in both U.S. and international bond funds can add another level of diversification to an already well-balanced portfolio.

Get a list of Vanguard U.S. bond funds

Get a list of Vanguard international bond funds
 

How much risk am I comfortable with?

Knowing the general traits used to identify the different bonds within a bond fund can help you select funds that are compatible with your overall tolerance for risk.

  • Average maturity. Bond funds come with short-, intermediate-, or long-term maturities. The longer the maturity, the more sensitive the fund is to changes in interest rates.
  • Credit quality. Bonds that are backed by the government or one of its agencies have the best "creditworthiness" and a lower chance of default than most corporate bonds. Corporate bonds with high credit quality are considered investment-grade bonds, and those below investment grade are considered high-yield ("junk") bonds.
     

Do I specifically want to keep pace with inflation?

Inflation-protected bond ETFs invest in government bonds and are routinely adjusted for inflation.

Maturity date

The date when the issuer of a money market instrument or bond agrees to repay the principal, or face value, to the buyer.

Investment-grade bond

A bond whose credit quality is considered to be among the highest by independent bond-rating agencies.

High yield bond

A bond that is usually rated lower than BBB/Baa and considered speculative compared to an investment grade bond. Also called a junk bond.

Get broad exposure to the bond markets

You can use just a few funds to complete the bond portion of your portfolio. Each of these ETFs and index funds gives you access to a wide variety of bonds in a single, diversified fund.

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

You must buy and sell Vanguard ETF Shares through Vanguard Brokerage Services (we offer them commission-free online) or through another broker (who may charge commissions). See the Vanguard Brokerage Services Commission and Fee Schedules for limits. Vanguard ETF Shares are not redeemable directly with the issuing Fund other than in very large aggregations worth millions of dollars. ETFs are subject to market volatility. When buying or selling an ETF, you will pay or receive the current market price, which may be more or less than net asset value.

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.

Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer's ability to make such payments will cause the price of that bond to decline. 

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.

Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund's trading or through your own redemption of shares. For some investors, a portion of the fund's income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax.