What Vanguard’s BND leaves out: TIPS, munis and high-yield bonds

Vanguard Total Bond Market ETF (BND) lets investors hold basically the entire investable U.S. investment-grade bond market for a low, low price of just 0.03% a year.

But it doesn't track the the entire bond market. BND's benchmark index leaves out inflation-protected Treasuries, municipal bonds, high-yield "junk" bonds and floating-rate notes. It also subtracts the bonds the Federal Reserve owns, so it holds fewer agency mortgage-backed securities compared to the iShares Core U.S. Aggregate Bond ETF (AGG), which includes them.

As of Sept. 30, 2026, 69% of the fund was in U.S. government and agency debt, and held no issues rated below BBB. The fund's average duration, a measure of how much a bond portfolio’s price changes when rates move, was 5.7 years. That means that an immediate 1 percentage point rise in interest rates at every maturity would cut bond prices about 5.7%.

BND’s net asset value total return was −3.43% in the third quarter of 2026, when Treasury yields rose sharply, and −1.82% for the year ended Sept. 30, 2026.

The fund's 30-day SEC yield, a standardized income estimate based on the holdings’ yield to maturity, was 4.99% as of Nov. 10, 2026. BND, the ETF share class of Vanguard Total Bond Market Index Fund, had $167.4 billion in assets as of Oct. 31, 2026. The whole fund, including its mutual fund shares, held $389.3 billion as of Sept. 30, 2026.

What the index leaves out

BND seeks to track the Bloomberg U.S. Aggregate Float Adjusted Index. This index measures the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market. It includes Treasuries, government-related and corporate securities, fixed-rate agency mortgage-backed securities, asset-backed securities and commercial mortgage-backed securities.

However, it excludes inflation-protected and tax-exempt bonds. Because Bloomberg's index is investment-grade and fixed-rate, it also excludes high-yield bonds and floating-rate bonds.

These exclusions come with tradeoffs: Without TIPS, the fund’s principal and income don’t adjust for inflation. Without municipal bonds, all of its income is subject to federal income tax. This is particularly tough on those in the very highest federal income tax brackets, so keep them in your prayers.

BND samples rather than replicates the index.

The fund samples the index, holding a range of bonds that together approximate it, rather than every bond in it. As of Sept. 30, 2026, BND held 11,434 bonds, against 14,254 in the index. Average effective maturity was 8.3 years for the fund and 8.2 for the index.

Under normal circumstances the fund invests at least 80% of net assets, plus any borrowings for investment, in index bonds or in securities Vanguard determines have substantially identical economic characteristics.

For the year ended Sept. 30, 2026, the net asset value return was −1.82%, against −1.81% for the index. Over the 10 years ended that day the fund returned an average of 1.13% a year and the index 1.17%. Those figures assume reinvested dividends, and they are pre-tax and after fees.

The fact sheet broke the fund down this way as of Sept. 30, 2026:

The 3.4% foreign line is priced in dollars. Bloomberg's index measures dollar-denominated bonds, not bonds in other currencies.

U.S. government bonds were 69% of the fund. Vanguard's footnote says that credit-quality line includes Treasury, agency, and agency mortgage-backed securities. AAA was 3.1%, AA 3.6%, A 12%, and BBB 12.2%. The fact sheet showed nothing rated below BBB.

Bonds with 10 years or less left were 79% of the fund: 0.2% under one year, 42.8% from one to five years, and 36% from five to 10 years. The other 21% had more than 10 years left, including 6.6% beyond 25 years.

How does the Federal Reserve ownership/float adjustment work?

BND’s index subtracts the bonds the Federal Reserve owns from each bond’s amount outstanding before it sets weights. iShares Core U.S. Aggregate Bond ETF (AGG) tracks the unadjusted Bloomberg U.S. Aggregate Bond Index, which counts those bonds. Both funds charge 0.03% a year

Daniel Sotiroff, associate director of manager research at Morningstar, wrote on July 7, 2026, that the adjustment steers the index away from agency mortgage-backed securities compared with that unadjusted index and with category peers. The index weights holdings by market value after the Federal Reserve's holdings are taken out, he wrote, and that leaves the fund overweight in Treasuries compared to category peers, around 40% to 50% of assets versus 30% for the category average.

Agency mortgages were still around 20% of the portfolio, he wrote. Vanguard's fact sheet put government mortgage-backed securities at 19.1%.

BND income and yield

Income dividends are generally declared and paid monthly. Capital-gains distributions, if any, generally come in December. Each fund generally distributes virtually all of its net income and any realized gains.

The latest income dividend was $0.256802 a share. The ex-dividend date was Nov. 2, 2026, and the payment date was Nov. 4. Vanguard's distribution yield on that dividend was 4.14% as of Nov. 2.

The 30-day SEC yield was 4.99% as of Nov. 10, 2026, Vanguard reported. Its note says that figure is based on the holdings' yield to maturity over the prior 30 days, and that the distribution may differ.

The distribution yield annualizes the cash the fund paid out. The SEC yield counts the holdings’ yield to maturity, which includes the gain a bond bought below face value earns as it nears maturity. When the fund’s average coupon is below its yield to maturity, as it was at 3.97% against 5.33% as of this writing on November 12, 2026, the cash payout runs below the SEC yield.

BND tax considerations

In a taxable account, BND’s income dividends are generally taxed as ordinary income. In 2025, its net asset value return was 7.11% before taxes and 5.43% after taxes on distributions at the highest federal income-tax bracket. Those after-tax figures do not apply to shares held in a tax-deferred account.

NOTE: Some states let shareholders exclude the part of a fund’s dividends that came from U.S. Treasury interest; the rules vary by state.

BND expenses

The annual expense ratio is 0.03%. The summary prospectus splits that into a 0.02% management fee and 0.01% in other expenses. Its example puts the cost at $3 for one year on a $10,000 investment, assuming a 5% return each year, expenses unchanged, and the shares sold at the end of the year. The example leaves out the brokerage commission to buy or sell.

Lipper, a fund research firm, put the average expense ratio for core bond funds at 0.62% as of Dec. 31, 2025, and 0.22% for the exchange-traded funds in that average.

On Nov. 10, 2026, the shares closed at $71.13, two cents above a net asset value of $71.11, a premium of 0.03%. About $747 million of shares changed hands a day over the 20 sessions through Nov. 11.

BND's exposure to interest rate risk

Q3 2026 has been a rough quarter for BND shareholders.

During that quarter, the 10-year Treasury yield rose 0.87 percentage point, its largest quarterly increase since 1994. The Federal Reserve raised its benchmark rate on Sept. 16, 2026, for the first time since 2023. And as most readers know, when interest rates rise, bond prices fall accordingly. BND’s NAV return for the quarter was −3.43%, against −3.44% for its benchmark index.

Looking forward, at a 4.99% SEC yield and a 5.7-year duration, a increase of 0.9 percentage point in yields over 12 months would roughly cancel a year of income, before taxes. The estimate divides the yield by the duration and ignores changes in the portfolio during the year.

Conversely, if interest rates start to decline, bond prices would go up — boosting returns for current shareholders, but reducing yields on new money invested.

The worst calendar year in the summary prospectus chart covering 2016 through 2025 was 2022, when the fund lost 13.15%, which the fund's annual report attributed to increasing interest rates.

The lowest quarterly return in that chart was −5.94%, for the quarter ended March 31, 2022.

The 5.7-year duration on the Sept. 30, 2026 fact sheet is a measure of how far the price moves when yields change. In the quarter ended Sept. 30, 2026, the BND's net asset value return was −3.43%, versus −3.44% for the index.

Those quarter figures assume reinvested dividends, and they are pre-tax and after fees. Vanguard said U.S. bonds posted negative returns as Treasury yields rose and bond prices declined.

Vanguard said Treasuries in the index lost 3.0% in the quarter and agency fixed-rate mortgage-backed securities lost 4.1%.