For many investors, indexing and Vanguard go hand-in-hand. After all, the asset manager pioneered the concept of tracking a stock market index and was one of the first firms to embrace ETFs as part of its line-up. It even has its own indexing fanbase, known as “Bogleheads”, named after its founder John Bogle. So, when Vanguard takes an active approach to managing a fund, it’s kind of a big deal.
When it launches several new active funds? Investors need to take notice.
And that’s just what has been happening. Vanguard continues to launch a variety of new active ETFs covering the fixed-income space, with four new funds launched over the last few months. For investors, these launches underscore how powerful active ETFs and active management can be in the bond space.
Indexing Pioneer
Jack Bogle technically didn’t invent index investing. Edward Renshaw, Paul Feldstein, and John Andrew McQuown were the first to research and design index products for pension plans. Bogle, however, popularized indexing with regular retail investors.
When Bogle launched Vanguard in the 1970s, indexing came to the retail investing masses. The firm’s early products focused heavily on owning the market and passively growing wealth. Since then, the asset manager has not looked back — rising to $9.3 trillion in assets under management. The bulk of those assets are in passive indexing products. The Vanguard 500 Index Fund, including all mutual fund share classes and an ETF, holds more than $1.4 trillion alone. Needless to say, indexing and passive investment run deep in its DNA.
Because of its creation and early adoption, Vanguard and the concept of indexing go together like peanut butter and jelly. Not many asset managers can say they have a loyal fanbase that is all-in on passive investors for their entire portfolios.
Active Bond Launches
With that in mind, Vanguard seems to be taking a different approach in recent months when it comes to new products — one that takes a decidedly active approach to management. Over the last few months, the firm has launched two active ETFs and has recently announced another.
The two funds launched since the end of November are the Vanguard Core Tax-Exempt Bond ETF (VCRM) and Vanguard Short Duration Tax-Exempt Bond ETF (VSDM). Both new ETFs focus on municipal securities.
The VCRM offers broad, active exposure to high-quality municipal bonds of various maturities, durations, and credit quality, focusing on investment-grade issues. The new fund’s mandate is total returns and income. The new ETF charges a rock-bottom 0.12% — or $12 per $10,000 invested — in expenses.
The VSDM will also focus on municipal securities with a mandate to stay on the shorter end of the maturity scale to generate tax-exempt current income. This fund also charges just 0.12% in fees. 1
As for its pending launch announcement, Vanguard is set to unleash the Vanguard Short Duration Bond ETF (VSDB). The actively managed ETF will be designed to provide current income and lower price volatility by holding short-duration U.S. investment-grade bonds. According to the fund’s mandate, it can hold structured products, such as asset-backed securities, and dip into below-investment-grade debt and emerging markets to seek additional yield. Expenses here will be 0.15%.
What’s interesting is that these fund launches are brand new and not ETF share classes of existing funds. What’s also interesting is that these offerings aren’t focused on equity or stocks, but rather bonds. This follows Vanguard’s continued push into active fixed-income ETFs. Last year, it launched the Vanguard Core Bond ETF (VCRB) and the Vanguard Core-Plus Bond ETF (VPLS).
Fixed Income Leads in Active ETF Returns
So, the fact that passive pioneer Vanguard is launching active ETFs in the first place is a big deal. The fact that they are in the fixed-income space, perhaps not. After all, fixed income is one of those sectors where active management can make a difference and outperform passive benchmarks.
This is because managers don’t have to look like an index, which tends to overweight the biggest debtors and ignore many of the opportunities in the bond space. There are over 65,000 fixed-income securities in the U.S. alone, not to mention tens of thousands more worldwide.
Active managers can overweight segments, change durations, and buy values amid the wreckage. As such, many active bond funds are able to outperform their benchmarks consistently. A recent Morgan Stanley Investment Management (MSIM) study found that active managers in the bond and fixed-income space have managed to crush their passive peers over 84 different rolling three-, five-, and 10-year periods. 2
Vanguard’s launches in space aren’t out of the ordinary and follow many of its peers. This chart from Morningstar shows that more than 133 active ETFs launched in the fixed-income space last year alone.
Source: Morningstar
With that, it’s easy to see why Vanguard has taken an active approach to the fixed-income space. Overall, it’s about better returns rather than passive investing that it built its business on. And since these new products are ETFs, they’ll provide some greater tax efficiency, which is crucial in the fixed-income space, and provide lower costs. That again helps provide outperformance.
Vanguard Active ETFs
These ETFs are selected based on Vanguard’s active management expertise. They are sorted by their YTD total return, which ranges between -2.5% and 1%. Their expense ratio ranges from 0.10% to 0.18%, while they have AUM between $48M and $4.1B. They are currently yielding between 1.1% and 5.2%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| VFMO | Vanguard U.S. Momentum Factor ETF | $319M | 1% | 1.1% | 0.13% | ETF | Yes |
| VFMV | Vanguard U.S. Minimum Volatility ETF | $89M | 1% | 2.4% | 0.13% | ETF | Yes |
| VCRM | Vanguard Core Tax-Exempt Bond ETF | $80.8M | 0.9% | 2.9% | 0.12% | ETF | Yes |
| VSDM | Vanguard Short Duration Tax-Exempt Bond ETF | $48.2M | 0.9% | 3.1% | 0.12% | ETF | Yes |
| VUSB | Vanguard Ultra-Short Bond ETF | $4.09B | 0.2% | 5.2% | 0.10% | ETF | Yes |
| VFQY | Vanguard U.S. Quality Factor ETF | $224M | -0.1% | 1.6% | 0.13% | ETF | Yes |
| VFMF | Vanguard U.S. Multifactor ETF | $168M | -0.4% | 1.9% | 0.18% | ETF | Yes |
| VCRB | Vanguard Core Bond ETF | $63M | -1.2% | 4.2% | 0.10% | ETF | Yes |
| VFVA | Vanguard U.S. Value Factor ETF | $589M | -2.5% | 2.7% | 0.13% | ETF | Yes |
Overall, Vanguard’s recent launches and planned new funds speak volumes about the power of active management in the fixed-income space. The passive pioneer has clearly made a decision to tap into active management due to its benchmark-beating returns in this market segment. This is great news for investors, as these funds will enjoy many of the same benefits as all Vanguard ETFs — lower-than-average costs. This is a massive win for portfolios and those looking to capitalize on fixed-income opportunities.
Bottom Line
Asset manager Vanguard and passive investing are one and the same. With the firm launching new active ETFs and plans for the fixed-income space, it’s worth taking notice. The firm’s latest active ETF endeavors underscore how active management in the fixed-income space can drive returns. In the end, it gives investors additional tools to outperform bond benchmarks.
1 Vanguard (January 2025). Vanguard Expands Fixed Income Lineup with New Actively Managed Bond ETF
2 MSIM (May 2024). Active Bond Managers Show Their Worth in a Turbulent Decade
