Trading Bonds at Vanguard – An In-Depth Look

vanguardThere was once a time when creating a diversified portfolio of individual bonds was an impossible endeavor for many retail investors.  Even if you held bonds to maturity in order to avoid wide bid-ask spreads doing your portfolio harm, and even if you avoided firms that charged egregious markups, you still had to grapple with high minimum investments and large commissions.  Nowadays, however, things are changing in favor of the everyday investor.  Some retail brokerage firms offer bond platforms that provide an adequate selection of individual bonds at extremely low commissions and very low minimum investments.  Two such firms are Vanguard and Fidelity.  In this article, I would like to focus on Vanguard’s bond trading platform.  In the near future, I will do the same for Fidelity.

  To see a list of high yielding CDs go here.  

Let me begin by saying that I think Vanguard does a great job as a provider of bond-trading services to retail investors.  Even when frustrating hiccups occur in the process of buying or selling a bond, nothing concerning the bond platform has caused me to move my business elsewhere.  What’s so great about trading bonds at Vanguard?  Here are a few things:

  1. Commissions – There are no commissions to buy a variety of new issue securities, includingTreasuries, agency securities, corporate bonds, and certificates of deposit.  There are also no commissions when trading Treasuries in the secondary market and no commissions when selling CDs in the secondary market.  Additionally, when trading agency securities, corporates bonds, municipal bonds, and CDs (just on a buy order) in the secondary market, you will not pay more than $2 per bond.  And, if you qualify for Voyager Select or Flagship Services, you won’t pay more than $1 per bond.  Additionally, there are no minimum purchase requirements (besides dealer requirements) for secondary market transactions in agency securities, corporate bonds, municipal bonds, and CDs.
  2. Price improvement – If Vanguard is able to get the bonds you want to buy at a better price than that at which your order was entered, the price improvement is passed along to you.  That may sound like a no-brainer, but the same can’t always be said for other retail bond brokers.
  3. In my experience, associates in Vanguard’s bond group have always been willing to check Bloomberg for bonds that have no offers on Vanguard’s platform.  Moreover, associates have also been willing to place orders for those bonds at the prices found on Bloomberg.  That’s not a luxury that all of Vanguard’s competitors provide.
  4. Easy search capabilities – I think the bond platform is very easy to use.  All the necessary search capabilities are provided.  I especially like the fact that investors can search for a specific company’s corporate bonds simply by typing in the common stock ticker symbol.  Also, I like the fact that the search-by-CUSIP box remains visible throughout one’s time on the bond platform.  It means that searching for any particular bond is always just one click away.
  5. Price changes update quickly – Vanguard’s platform does an excellent job updating prices.  While the quotes are not streaming, I’ve noticed that they do update much faster than, for example, Fidelity’s system.

Although I think Vanguard’s bond trading services are likely quite sufficient for the majority of retail investors, it doesn’t mean there aren’t areas of opportunity.  Here are some examples:

  1. Vanguard’s “Enter CUSIP” box on the bond platform used to allow a client to enter multiple CUSIPs at once (separated by commas).  This allowed investors to quickly find the prices of a group of bonds they might be following.  I loved that functionality and wish Vanguard would bring it back.
  2. The website doesn’t allow multiple screens to be running at once while logged into the bond platform.  For example, let’s say I want to follow the prices of three bonds over a period of time.  On Fidelity’s website, I can open three windows side-by-side (while logged in), one window displaying each of the bonds.  During whatever period of time I am following the bonds, I could then quickly refresh each screen to see the most recent price.  Vanguard’s website, on the other hand, recognizes that multiple windows are open and doesn’t allow you to proceed on more than one window.  This is a minor inconvenience but an inconvenience nevertheless.
  3. Something that is more than a minor inconvenience is the frequency with which I get timed out on Vanguard’s website.  On a regular basis, I can’t even finish scanning the bonds that appear from a bond screen before getting timed out.  Apparently, the website doesn’t recognize scrolling within the page as being active.  That is very frustrating and is something Vanguard should absolutely fix.  In comparison, I have never been timed out on Fidelity’s website.
  4. Vanguard doesn’t show all available bonds on a bond screen.  Variable-rate bonds and some foreign bonds are blocked from the search results.  Unless you already know about the bonds and know to call Vanguard to have an associate look on Bloomberg for an offer, you could be missing out on bonds that are suitable for your portfolio.
  5. If you own Treasury securities, Treasury interest takes an extra day longer than it should to sweep to your money market.  As an example of what I mean, I own the same Treasury bond at Vanguard and Fidelity.  Last week, February 18 was an interest payment settlement day for the CUSIP I own at both firms.  At Fidelity, I could already see the funds in my account on February 18, and, as soon as the market closed that day, Fidelity allowed me to place a sell order to sweep the funds to my checking account.  Vanguard, on the other hand, didn’t even show the funds on the brokerage side of my account until February 19, and the funds weren’t available for withdrawal until the 20th.  The funds from Fidelity had already hit my checking account before I was even able to enter the withdrawal order at Vanguard.  And remember, I am referring to interest paid by the exact same CUSIP.  In my Vanguard brokerage account, this type of thing happens every single time Treasury interest is paid.

For investors curious about Fidelity’s bond trading services, I will conduct a similar overview in the near future.

More from The Financial Lexicon:

The 5 Fundamentals of Building a Retirement Portfolio

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Comments

  1. Howard says

    the only problem trading bonds at fidelity is when you need to sell a bond…their bond desk gives you a low bid for your bonds and then scalps it to a broker dealer seconds later at a substantial profit..their bond desk never has a losing trade at the expense of their fidelity customers…

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