Vanguard’s first active bond ETF, the Vanguard Ultra-Short Bond ETF (VUSB), recently celebrated its three-month birthday. Though it is new to the scene, the fund has already amassed over $1 billion, ranking as the ninth largest out of 27 ETFs in the ultra-short term ETF space. Not bad for the new kid on the block.
The fund’s popularity comes as no surprise. The ETF is managed by the Active Taxable Fixed Income Team in the Vanguard Fixed Income Group. The team manages $2 trillion in global assets under management, including $309 billion in U.S.-domiciled fixed income ETFs.
In addition to the team’s experience in fixed income markets, the fund is also competitively priced, at just 0.10%—just over half of the average expense ratio of 0.18% for the category.
Active Management Advantage
Fixed income ETFs, especially in a low-rate environment, are also particularly well-suited for active management. Passive tracking of an index, such as the Bloomberg Barclays US Treasury Bellwethers 1-Year Index, limits return potential to that of Treasuries.
But Vanguard’s active approach means that the management team can be nimble, going where they see opportunity and adjusting to the shifting market environment. Per the prospectus, VUSB can invest not only in Treasuries, but may also include investment-grade credit or asset-backed securities.
Active managers are still the minority when it comes to ETF assets. There is nearly $129 billion in active fixed income ETFs. Compare this to passive fixed income ETFs where the largest fund, the iShares Core U.S. Aggregate Bond ETF (AGG), alone has $88.7 billion in AUM.
The largest active fixed income ETF is a direct competitor of VUSB. The JPMorgan Ultra-Short Income ETF (JPST) has $17.3 billion in AUM. VUSB has the advantage when it comes to cost, ringing in at 0.10% to JPST’s 0.18%. In spite of the size difference, the funds have comparable spreads, as seen by using our ETF Comparison Tool.
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Similar to VUSB, JPST selects from a universe of investment-grade bonds, with flexibility to invest in corporates, Treasuries and asset-backed securities. Another feature that might appeal to some is that JPST considers ESG characteristics when constructing the portfolio.
There are some minor differences between the funds. VUSB has the flexibility to maintain a dollar-weighted average maturity of zero to two years, whereas JPST seeks to have an effective duration of a year or less. Currently, JPST has a duration of 0.64 years versus 1.0 years for VUSB, meaning Vanguard’s fund is more sensitive to changes in interest rates.
Since inception, VUSB has mostly lagged JPST after getting off to a rough start in the weeks following launch. VUSB has gained 0.11% since inception versus 0.17% for JPST over the same time frame.
VUSB briefly outperformed JPST due to a relatively drastic price move between June 18 and June 22. This price movement was due to a large trade at the closing auction, resulting in a higher-than-usual premium in the closing market price for the fund. The fall on the following trading day was due to the market price trading more in line with its NAV.
More Flexibility At Higher Cost
Though it is technically found in the short-term ETF category, the PIMCO Enhanced Short Maturity Active ETF (MINT) is another actively managed fixed income ETF that aims to keep duration below one year.
Though the fund currently has a duration of 0.51 years, the dollar-weighted average may go up to three years, which is why it lands in the short-term category. This fund is the second-largest active fixed income ETF, with $14.0 billion in AUM.
MINT is expensive relative to VUSB and JPST, with an annual expense ratio of 0.37%. Though the fund’s increased flexibility has allowed it to outperform both VUSB and JPST over the past few months, this has only been by a matter of a few basis points, since this is short-term fixed income after all. In this asset class, fees are of even greater importance than usual, since the expected returns are already quite low, especially in the current environment.
Looking at the longer track records of JPST and MINT underscores this point. Over the trailing three years, JPST has returned approximately 7.1%, while MINT is up 6.0%. If MINT’s fee had been in line with that of JPST, this would have closed the gap by more than half.
Charts courtesy of StockCharts.com
Though it is too early to draw many conclusions from performance comparisons of these three funds, it is clear that Vanguard’s choice to release an active ultra-short bond ETF has been a smart one. Vanguard has proven itself to be a thoughtful issuer when it comes to ETFs. VUSB was its first launch since September 2020, and only their second since the end of 2018.
Similar to other asset classes that Vanguard has chosen to enter, VUSB is competitive in price relative to larger funds in the space. It is likely to continue to gather assets due to the issuer’s brand strength as well as investor demand for active ultra-short bond funds.