Vanguard’s Bond Revolution: Navigating the Fixed Income Frontier

In the world of investing, few names command as much respect as Vanguard when it comes to passive index fund investing. Founded by Jack Bogle, who famously championed low-cost index funds as the path to retirement success, Vanguard has built an empire on the principle that paying active managers hefty fees in an efficient market ultimately hurts investors’ returns. This philosophy has attracted legions of devoted “Bogleheads” who have faithfully followed this approach for decades. Yet surprisingly, when it comes to fixed income investments, the $11 trillion asset manager is taking a dramatically different approach that seems to contradict its foundational principles.

Vanguard has been aggressively expanding its actively-managed bond offerings, launching four new active bond ETFs in 2025 alone. The firm now manages a staggering $1.1 trillion in active fixed-income assets, including a substantial portion in money-market funds, placing it second only to BlackRock’s $1.2 trillion in this category. Since 2021, Vanguard has introduced nine active bond ETFs that collectively hold more than $10 billion in assets. The performance of these actively managed bond funds has been impressive – according to Vanguard’s own figures, 44 of its 48 active bond funds with a 10-year track record have outperformed their peer group averages. This success challenges the conventional wisdom that passive investing always wins, at least in the bond market. As Michael Chang, Vanguard’s head of high-yield portfolio management, explains, “The fixed income market, certainly relative to the equity market, is much more complicated, oftentimes much more inefficient, and certainly less liquid. That’s the type of environment where if you know what you’re doing, there’s potentially a lot more value to be added via active management.”

The firm’s expansion into active bond management reflects the fundamental differences between stock and bond markets. While stocks can be easily organized into straightforward market-cap weighted indices like the S&P 500 at virtually no cost, the bond market is far more fragmented and complex. There are dozens of indices tracking different segments of the bond market – from investment-grade debt to high-yield bonds, inflation-linked securities, corporate bonds, municipal bonds, and more. Recognizing this complexity, Vanguard launched its multi-sector bond mutual fund (VMSAX) in 2021, followed by the Multi-Sector Income Bond ETF (VGMS) in May 2025. These funds have already accumulated $400 million in assets, with VMSAX posting a three-year annualized return of 7.8%, slightly outperforming its benchmark’s 7.3%. True to Vanguard’s cost-conscious reputation, these actively managed funds still come with relatively low fees – the multi-sector bond ETF charges 0.30% of assets under management, significantly lower than the peer group average of 0.92% for similar funds, though higher than Vanguard’s firm-wide average expense ratio of 0.07%.

Vanguard’s shift toward active bond management comes at a potentially pivotal moment in financial markets. The firm’s research team is now recommending investors allocate more heavily toward bonds than at any time in recent memory. Its “time-varying” asset allocation model – designed for investors with a risk tolerance suitable for a standard 60/40 portfolio – now suggests a dramatic 70% allocation to bonds and just 30% to stocks. Vanguard’s analysts project that such a bond-heavy portfolio would generate a 5.5% expected annualized return over the next decade, outperforming a traditional 60/40 portfolio’s projected 5.2% return with significantly less volatility. This recommendation reflects Vanguard’s concerns about high stock valuations and its optimism about fixed income as the Federal Reserve prepares to cut interest rates, which typically boosts bond prices. “Investment-grade bonds, and particularly longer-term treasuries, tend to provide the most ballast if you have a correction in the equity market,” notes Todd Schlanger, senior investment strategist at Vanguard, adding, “Given the high valuations and expectation for lower returns in equities, we’re a bit longer duration in fixed income.”

Within its bond portfolios, Vanguard is making strategic choices that reveal its approach to active management. The Multi-Sector Income Bond Fund focuses heavily on credit-focused investments rather than asset-backed or mortgage-backed securities, which make up less than 10% of the fund despite being common in competing funds. The portfolio includes bonds from telecom companies like CBS Corp., Charter Communications, and Univision – companies navigating industry disruption from cord-cutting. About half the fund consists of investment-grade bonds (rated BBB or higher), with the remainder in higher-yielding but riskier debt. Chang and his team are also looking at emerging market bonds from countries like Mexico, Colombia, Oman, Serbia, and South Africa. Interestingly, Chang sees potential benefits from the growth of private credit to a $2 trillion market, suggesting it has actually improved the credit quality of the public high-yield market by absorbing riskier debt, particularly from leveraged buyouts. “As a result, we would not expect default rates to peak as high during the next recession compared to prior cycles,” he notes.

While fixed income will never overshadow passive stock indexing as Vanguard’s primary identity – its flagship Vanguard Total Stock Market Index Fund alone holds $2 trillion in assets – this pivot toward active bond management represents a significant evolution for the 50-year-old firm. It’s particularly notable given Vanguard’s recent alliance with Wellington and Blackstone to build products combining public and private markets, with 15% to 30% allocated to Vanguard’s actively-managed bond funds. This midlife reinvention could herald a broader shift in investor behavior if bonds indeed move to center stage in the coming years. As interest rates potentially decline from their recent highs and AI-fueled stock valuations remain stretched, Vanguard’s bet on active bond management may prove prescient. For a firm that built its reputation on passive stock indexing, this embrace of active bond management demonstrates a pragmatic recognition that different asset classes may require different approaches – even if that means departing from the gospel according to Bogle.