Key Morningstar Metrics for Vanguard Short-Term Bond ETF
- Morningstar Medalist Rating: Silver
- Process Pillar: Above Average
- People Pillar: Above Average
- Parent Pillar: High
Vanguard Short-Term Bond ETF’s BSV broad reach and rock-bottom fees strengthen an already high-quality portfolio.
The Bloomberg US 1-5 Year Government/Credit Index, which underpins this fund, takes a simple but sensible approach. The benchmark sweeps in investment-grade government and corporate bonds with between one and five years until maturity. It filters out riskier types of bonds and employs a minimum size threshold to keep the portfolio away from the illiquid corners of the market that are tougher or more expensive to trade. The fund’s market-value weighting efficiently determines its positions and diversifies its portfolio.
The fund’s sector composition reflects Treasuries’ dominance over the short-term bond market. Government bonds often account for over 70% of the portfolio, with the rest allocated to corporate bonds. Excluding securitized bonds mitigates risk, but the fund will miss out on pockets of additional returns that category peers can exploit.
The resulting portfolio sports a high-quality tilt, unlike active peers that differentiate themselves by veering toward riskier corners of the market. Nearly three-fourths of this portfolio carries AAA or AA credit ratings, compared with only 40% for the Morningstar Category average. The fund scored most of its gains over the category average when it preserved capital better than most peers during credit shocks. It posted positive returns and substantially outpaced the category norm in the 2008 financial crisis and in March 2020, for instance.
The fund’s average duration is often a few months longer than that of the category average. Its one-year minimum maturity threshold keeps it away from cashlike bonds that flexible peers reach into. The fund has benefited from falling interest rates, most recently in the middle of 2024. Nonetheless, credit risk is still the main driver of its category-relative performance. Missing out on credit rallies can chip away at its edge. So far, the fund’s broad portfolio and low fee have preserved its excess return.
Vanguard Short-Term Bond ETF: Performance Highlights
This strategy has measured up well against its category. The exchange-traded fund share class outpaced the category average by 35 basis points annualized from its 2007 inception through July 2025. The fund can be slightly more volatile than the average peer, given its slightly longer duration. But its high-quality portfolio keeps risk in check when it matters: during major credit shocks.
Its conservative credit risk profile steadied the fund when the entire market wobbled. It managed to post positive returns during the 2008 financial crisis and March 2020 covid shock, beating the category average by 5.7 and 5.3 percentage points, respectively. Much of the fund’s excess return came from superior protection during these stress periods.
The fund’s slightly longer duration also added to its returns when interest rates fell. It eked out 42 basis points over the category norm between May and September 2024, when the Federal Reserve lowered interest rates.
However, the fund will lag category peers when credit risk is in favor or when interest rates rise. These conditions dented the fund’s since-inception excess returns over the past few years. It trailed the category average in both 2023 and 2024 as credit spreads remained tight. The fund enjoyed a brief reprieve between February and April 2025 as investors shunned credit risk in the face of heightened volatility. Nonetheless, this fund’s most durable advantage lies in its razor-thin fee. Each share class charges only a few basis points per year, presenting a smaller hurdle than nearly all category peers.