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By Paul J. Lim
May 4, 2015
The Vanguard Group headquarters in Malvern, Pennsylvania
The Vanguard Group headquarters in Malvern, Pennsylvania
Mike Mergen—Bloomberg via Getty Images

With a whopping $117 billion in assets, Vanguard Total Bond Market Index is now the biggest bond fund in the world, overtaking the long-reigning champ Pimco Total Return, according to data reported by the Wall Street Journal. If you add in the assets held by Vanguard’s exchange-traded fund version of Total Bond Market, the fund controls about $144 billion.

While big in dollar terms, this portfolio isn’t so large in scope. Here are some things you may not know about bondland’s new 800 lb. gorilla:

Despite its name, Vanguard Total Bond Market doesn’t come close to giving you exposure to the total bond market.
Sure, this fund does give you decent market exposure, but it limits that to the universe of high-quality bonds. This means the fund can own debt issued by the U.S. government, government agencies, and “investment grade” corporations with pristine credit.

Only around one tenth of 1 percent of the fund’s assets are held in high-yielding “junk” bonds issued by companies that are considered less than “investment grade.” In the bond world, higher quality issuers can get away with paying lower yields. This explains why the average yield for this fund is a modest 2%.

This fund doesn’t even give you adequate exposure to high-quality corporate bonds.
While Vanguard Total Bond Market does own high-quality corporate securities, they represent less than one quarter of the fund’s assets. With more than 75% of its assets in Treasuries and U.S. agency-related debt, this is more of a government bond fund than anything else.

This is why Money has recommended supplementing this fund (which is in our Money 50 list of recommended mutual and exchange-traded funds) with a corporate-centric portfolio, such as iShares iBoxx Investment Grade Corporate ETF (which is also in the Money 50).

This fund gives you extremely little foreign exposure.
Technically, Vanguard Total Bond Market does own a tiny amount of international debt. But the biggest weighting is to Canada, which makes up less than 1.7% of the fund. In fact, bonds based in the U.K, Germany, Mexico, and France each make up less than 1% of the fund’s total assets.

To really gain foreign exposure, you will have to further supplement this fund with an international fixed income fund, such as Vanguard Total International Bond Index fund, which is also in the Money 50.

Unlike the past champ, Pimco Total Return, this fund runs on autopilot.
As its name would indicate, Vanguard Total Bond Market Index is an index fund. This means that instead of being controlled by a star manager who picks and chooses which bonds to buy and sell, this fixed-income portfolio passively tracks a fixed-income market benchmark. In this case, that’s the Barclays Capital U.S. Aggregate Float-Adjusted Index.

Vanguard Total Bond became the biggest bond fund sort of by default.
While Total Bond has been consistently gaining investors in recent years, it didn’t win the crown so much as Pimco Total Return lost it. At its peak, Pimco Total Return wasn’t just the biggest bond fund, it was the largest mutual fund in the world. Yet after approaching nearly $300 billion, Pimco Total Return lost more than half its assets as investors fled amid infighting at Pimco which eventually led to the departure of famed fixed income manager Bill Gross. Today, Pimco Total Return is down to around $117 billion.

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The purpose of this disclosure is to explain how we make money without charging you for our content.

Our mission is to help people at any stage of life make smart financial decisions through research, reporting, reviews, recommendations, and tools.

Earning your trust is essential to our success, and we believe transparency is critical to creating that trust. To that end, you should know that many or all of the companies featured here are partners who advertise with us.

Our content is free because our partners pay us a referral fee if you click on links or call any of the phone numbers on our site. If you choose to interact with the content on our site, we will likely receive compensation. If you don't, we will not be compensated. Ultimately the choice is yours.

Opinions are our own and our editors and staff writers are instructed to maintain editorial integrity, but compensation along with in-depth research will determine where, how, and in what order they appear on the page.

To find out more about our editorial process and how we make money, click here.

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