Vanguard’s New Target Maturity Corporate Bond ETFs

In March of this year, Vanguard released a new line of Target Maturity Corporate Bond ETFs. (Prospectus here.) The line currently consists of Vanguard Target Maturity 2027 Corporate Bond ETF (VBCA) through Vanguard Target Maturity 2036 Corporate Bond ETF (VBCJ). In other words, one fund for each year, up to ten years in the future.

The funds do pretty much what you’d expect from the name:

• Each fund holds (domestic) investment-grade corporate bonds that mature (or are expected to be called) in the year in question. For example, the Vanguard Target Maturity 2029 Corporate Bond ETF holds bonds that mature or are expected to be called in 2029.
• Each month, the fund distributes whatever income the underlying bonds paid.
• And then once all the bonds have matured, the fund makes a final distribution of the entire net asset value.

The idea, broadly, is that these funds could be used to create a corporate bond ladder, extending up to 10 years in the future. Vanguard even released a neat “BondBuilder Laddering Tool” to go along with the funds.

If you’re going to own corporate bonds, diversification among issuers is critical, for exactly the same reason why diversification is critical when owning stocks: you don’t want to have a disaster if any one company goes out of business.

So if you want to build a ladder of corporate bonds, using funds like these is much easier than buying individual bonds from a whole bunch of different issuers.

But do you want to build a ladder of corporate bonds?

I don’t, particularly.

To be clear, there’s nothing at all wrong with doing so. But most of the time if I’m considering a bond ladder, it’s specifically for asset-liability matching. That is, the point is the safety that a ladder can provide (due to holding bonds until maturity), relative to most funds (which maintain a steady average maturity and thus if you ever want to sell shares to raise cash, you’re always selling bonds prior to maturity). And if the goal is safety, then I specifically want the ladder to be Treasury Inflation-Protected Securities (TIPS).

Again, there’s nothing at all wrong with these funds. They’re low-cost, and I expect they’ll do a great job of doing what they say they’ll do. If you want a corporate bond ladder, these are a good choice (for up to 10 years of ladder rungs, that is).

It’s also worth noting that iShares has offered target-maturity investment-grade corporate bond ETFs since 2016. They are also low-cost and do basically the same thing. So the idea isn’t new. This is just Vanguard also offering a product in this category. (iShares also offers target-maturity ETFs of nominal Treasury bonds, TIPS, municipal bonds, and high-yield corporate bonds.)