Bonds and Fixed Income

Where the money actually sits

The category holds 79 funds and 1779.3B in combined assets, and those assets are not spread evenly. Vanguard Total Bond Market ETF (BND), run by Vanguard, holds 389.1B on its own, and the three largest, Vanguard Total Bond Market ETF (BND), iShares Core U.S. Aggregate Bond ETF (AGG) and Vanguard Total International Bond ETF (BNDX), account for 36.3 % of the total. At the other end, iShares EUR Govt Bond 3-7yr UCITS ETF EUR (Dist) (EXHB) manages only 179M. Size is no guarantee of quality, but it decides two very concrete things: the spread between buying and selling price you pay on every order, and the odds that the fund still exists in ten years.

The fee gap, in money

Ongoing charges run from 0.03 % for Vanguard Total Bond Market ETF (BND) to 1.01 % for Direxion Daily 20+ Year Treasury Bull 3X Shares (TMF), a gap of 0.98 points, against a category average of 0.16 %. On £10,000 held for ten years that gap is roughly 980 in extra charges, before counting the return that money would itself have earned. It is the one variable in the comparison known in advance: past performance does not repeat, fees repeat every year.

Two funds in one category do not hold the same basket

The 79 funds listed track 73 different indices, among them Bloomberg U.S. Aggregate Float Adjusted, Bloomberg U.S. Aggregate Bond, Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped USD Hedged and Bloomberg US Government Float Adjusted Bond. The largest tracks Bloomberg U.S. Aggregate Float Adjusted. That spread is why two funds filed under the same theme can differ by several points over a year: they hold different securities, weight them differently and rebalance on different dates. Each fund page names its index, and that is where a serious comparison starts.

Replication and domicile

78 funds hold the constituents of their index directly, 1 use a swap, including Direxion Daily 20+ Year Treasury Bull 3X Shares (TMF) from Direxion. Synthetic replication often tracks more closely and reaches markets that are hard to hold directly, at the price of a counterparty risk that is regulated but real. Physical replication is easier to understand and allows securities lending, which earns the fund income and adds its own risk.

39 of the 79 funds are domiciled in US, the rest in IE, LU and DE. Domicile sets the withholding tax the fund itself suffers on the dividends it receives, a cost absent from the stated fee but present in the return, and it also sets your own tax treatment depending on where you live.

Accumulate or take the income

12 funds accumulate dividends, 67 pay them out. The largest accumulating share class is iShares Core Global Aggregate Bond UCITS ETF EUR Hedged (Acc) (AGGH), the largest distributing one Vanguard Total Bond Market ETF (BND). The choice is not about yield, both versions of the same index return the same before tax, but about tax and discipline: the accumulating class reinvests with no cost and no decision, the distributing class pays income that is taxable in the year it arrives.

Age and critical size

The oldest fund in the category, iShares EUR Govt Bond 3-7yr UCITS ETF EUR (Dist) (EXHB), launched on 2002-04-22, giving 24 years of history, and the newest, iShares USD Corporate Bond ESG UCITS ETF USD (Dist) (SUAG), on 2019-09-18. A long record shows how the fund behaved in a fall, which no one-year number can. A fund launched two years ago has lived through a single market regime.

None of the 79 funds manages under 100 million, the smallest being iShares EUR Govt Bond 3-7yr UCITS ETF EUR (Dist) (EXHB). The category is therefore clear of closure risk for want of size, the risk that forces a sale on the issuer's timetable rather than the holder's.