At a time when investors are thirsty for safe, income-generating assets, it is not surprising that investment-grade corporate bond exchange traded funds are adding assets at a rapid rate this year. Yields on investment-grade U.S. corporate bonds have declined. However, corporate bond yields remain much more attractive. For instance, interest rates on 7-to-10 year bonds of high-quality U.S. companies are 3.14%, compared to 3.92% a year ago.
Currently, credit spreads are falling. Looking at corporate bonds, the diminish spread between government Treasury yields and corporate debt yields reflects investors’ lower perceived risks ahead.
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The ongoing low-yield environment and improving economic sentiment has helped push investors toward corporate debt. However, potential investors should be aware that corporate bonds have historically exhibited grater volatility than U.S. Treasuries due to the increased volatility in corporate cash flows and credit risks, along with greater liquidity risks.
The Vanguard Short-Term Corporate Bond Index Fund (NYSEArca: VCSH) is a popular option for investors looking for a steady, inexpensive avenue to corporate bonds without significant interest rate risk.
[related_stories]“VCSH seeks to match the performance of the Barclays U.S. 1-5 Year Corporate Bond Index. The index consists of investment-grade, taxable corporate bonds issued by companies from stable sectors, including industrials and utilities. As of June 2, 2016, the fund held 2,018 securities, which gives it strong diversification. Over 97% of its assets are concentrated in securities with maturities between one and five years,” according to Investopedia.
Bond ETF investors can move down the yield curve with shorter duration bond funds. Duration is a measure of a bond fund’s sensitivity to changes in interest rates, so a shorter duration reflects a lower negative response to higher interest rate.
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“VCSH has a very low expense ratio of 0.12% and stable price performance. Its 50-day realized volatility of 1.7% and 200-day realized volatility of 1.71% rank below average compared to other corporate bond funds. The fund has returned 3.44%, 8.31% and 13.57% over one-, three- and five-year time horizons with very little risk,” adds Investopedia.
Vanguard Short-Term Corporate Bond Index Fund
