Fixed Income: U.S. - Government/Credit Investment Grade Intermediate
[Insight as of 11/28/14] The two funds in the U.S. Intermediate Government and Credit segment hold all types of investment-grade debt issued in the US with the lone exception being
“Fit the most critical consideration” asset-backed securities. Included in this group are Treasurys, corporate bonds, agency debt, municipals and supranational bonds.
The key differences between the two funds have to do with how they define the market and how much they charge to provide exposure. GVI, like our benchmark, considers bonds expiring between 1 and 10 years from now to be in the intermediate bucket. By comparison, BIV holds bonds with maturities ranging from 5-10 years. As such, BIV takes on significantly more interest-rate risk.
The exclusion of the 1 to 5-year tranche of the government and credit market will cause BIV to consistently carry longer weighted average maturities and effective durations than GVI. As of the last holdings update, BIV’s average maturity and duration are 7.2 years and 6.5 years, respectively, were indeed much higher than our benchmark. The fund also had a bias to lower-rated bonds. The combination of higher interest rate and credit risk increases BIV’s yield beyond that of our benchmark.
GVI holds bonds expiring 1-10 years from now, with about 70% of the portfolio expiring in the next 5 years. As such, it has a much shorter average maturity and effective duration than BIV, giving it significantly less yield. BIV is 10 bps cheaper than GVI and significantly more liquid.
In the end, the difference in exposure between the two funds will have far more impact on returns over time than the difference in fees or trading costs, making Fit the most critical consideration. (Insight updated 11/22/17)
ETF.com Efficiency Insight
[Insight as of 11/28/14] BIV is significantly cheaper than GVI, charging half as much as GVI. Despite this, GVI actually scores better here thanks to superior tracking, transparency and tax
“BIV is significantly cheaper than GVI” efficiency.
Whereas GVI discloses its holdings on a daily basis, BIV’s issuer only provides holdings on a monthly basis lagged by two weeks. This lack of transparency is out of line with the principles of ETFs, and costs BIV points here.
In addition, GVI has managed to track its index tightly without significantly volatility while avoiding any capital gains distributions. BIV, on the other hand, has provided sloppy index tracking and has made capital gains distributions in the past 3 years. The truth is many bond funds distribute capital gains, but the fact that GVI has avoided them is a feather in the fund’s cap.
Thankfully, investors choosing between the two funds will have a solid, stable choice in either GVI or BIV. Both funds have more than $1B in assets and strong issuers, so neither is a threat to close. (Insight updated 11/22/17)
ETF.com Tradability Insight
[Insight as of 11/28/14] BIV gets five times as much daily volume as GVI, but both funds can be accessed relatively cheaply Spreads on BIV average 6 bps, while the market for GVI is about 7
“BIV gets five times as much daily volume as GVI” bp wide. The actively inclined will find BIV’s superior daily volumes more attractive, but longer-term investors will see little difference as long as they use limit orders set close to iNAV.
Larger investors and institutions should consider contacting multiple liquidity providers and the issuer’s capital markets desk to get the best prices. (Insight updated 11/22/17)
ETF.com Fit Insight
[Insight as of 11/28/14] Investors choosing between GVI and BIV have two distinct choices. The funds define the market in different ways, which has a big influence on the risk profile of
“The funds define the market in different ways” each. GVI, which looks the most like our benchmark, considers bonds maturing between 1-10 years from now to be intermediate.
BIV considers bonds expiring 5-10 years from now to be intermediate-term issues. By excluding shorter term securities, BIV carries significantly more interest-rate risk and reward, and its duration and YTM reflects this reality. The fund’s effective duration is about 6.5, which compares with roughly 3.9 for our benchmark. The 1,600 bonds BIV holds are just about evenly split between the 5 to 7 and 7 to 10-year maturity buckets and produce a YTM of 2.5%. The vast majority of the portfolio is in Treasurys and investment-grade corporate debt (90% of portfolio by weight), with the balance spread among munis, supranationals and agency debt.
GVI’s more inclusive portfolio has a similar concentration in Treasurys and corporate bonds, but generates less yield thanks to its 70% weighting in bonds expiring in the next 5 years. This aligns much more closely with our benchmark, but may not suit your definition of the intermediate market, with its average maturity of 4.1 years. (Insight updated 11/22/17)