What Is a Total Bond Fund?
A total bond fund is a mutual fund or exchange-traded fund that seeks to replicate a broad bond. A total bond fund owns many securities across a range of from both public and private sectors. The most common index used as a benchmark is the Barclays Aggregate Bond Index, which captures Treasury bonds, corporate bonds, municipal bonds and high-grade mortgage-backed securities.
The Functionality of a Total Bond Fund
In order to mimic an issue that is not accessible for acquisition by the fund, total bond funds may choose to invest in bonds that are comparable to the issue in terms of maturity, class, and rating. One reason for the existence of these limits is because, in comparison to equity markets, bond markets are characterized by a greater degree of variety and relative illiquidity. When it comes to total bond funds, it is essential that they have interest rates and maturities that are comparable to those of the base index.
When compared to whole stock funds, total bond fund portfolios really have a little bit more leeway in terms of the securities that they choose to invest in. Due to the fact that individual bond issues have lower liquidity compared to stock issues, some funds are required to avoid specific bond issues that are included in the benchmark index while selecting other bonds that are not included in the index.
A significant number of total bond funds contain a minor allocation, which is around twenty percent of the assets. This allocation allows the managers to choose bonds at their own discretion and hold them in assets that are not included in the Barclays Index. These assets include foreign bonds, derivatives, and lower-rated corporate paper. Fund managers are given the opportunity to make investments in assets that are not associated with one another, all the while maintaining the overall risk profile of the fund within the same range as that of the Barclays Index.
The most significant risk measures to remain near to the index are the length, or sensitivity to fluctuations in interest rates, as well as the maturity, or more particularly the weighted average maturity. Additionally, the maturity should be kept close to the index.
Index of the Total Bond Market from Vanguard
In order to offer a comprehensive exposure to investment-grade bonds issued by the United States, the Vanguard Total Bond Market Index was developed. In order to achieve this objective, the fund allocates about thirty percent of its assets to corporate bonds and seventy percent to U.S. government bonds of various maturities, including short-, intermediate-, and long-term issues. The fund has a return of 1.34% on an annualized basis for a period of ten years as of June 2022.
The fund, like other bond funds, is subject to the risk that rises in interest rates might result in a fall in the price of the bonds that are included in the portfolio, which would result in a decrease in the fund's net asset value (NAV). It is possible for investors to consider the fund to be their primary bond holding due to the fact that it invests in all categories and maturities of the fixed income market.
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