The Vanguard Intermediate-Term Corporate Bond ETF (NYSEArca: VCIT) is one exchange traded fund that can help investors boost income on bond investments without taking on significantly higher risk.
VCIT, one of the kings among intermediate-term corporate bond exchange trade funds, is also one of the least expensive funds in this category. This Vanguard fund charges just 0.07% per year, or $7 on a $10,000 investment, making it cheaper than 91% of competing funds, according to Vanguard data.
VCIT seeks to track the performance of a market-weighted corporate bond index with an intermediate-term dollar-weighted average maturity, namely the Bloomberg Barclays U.S. 5-10 Year Corporate Bond Index. While VCIT holds debt issues with maturities between 5 and 10 years, they are all investment-grade holdings to minimize default risk.
VCIT “provides market-cap-weighted exposure to investment-grade U.S. corporate bonds with between five and 10 years until maturity,” said Morningstar. “It is one of the lowest-cost options in the corporate-bond Morningstar Category and has tightly tracked the Bloomberg Barclays U.S. 5-10 Year Corporate Bond Index. While there’s plenty to like here, it’s important to note that this fund has heavy exposure to the financial-services sector, which could be a source of risk. It earns a Morningstar Analyst Rating of Silver.”
View On VCIT
Fixed-income ETF investors should look into the opportunities in the short-end of the yield curve to generate income while mitigating duration risk and consider ways to blend active and passive exposures to position portfolios in today’s bond market.
Related: Fixed-Income ETF Strategies for Rising Interest Rates
VCIT has an average duration of 6.4 years and an average effective maturity of 7.5 years. The fund’s yield-to-maturity is 4.1%. This Vanguard ETF holds nearly 1,730 bonds and has $18.6 billion in assets under management.
“The strategy’s three- and five-year annualized returns of 2.2% and 2.8% were behind the category average. This underperformance was driven principally by the portfolio’s relatively conservative construction that excludes below-investment-grade bonds. Its risk-adjusted returns, measured by Sharpe ratio, were in line with the category average over the same periods thanks to its significant cost advantage,” according to Morningstar.
VCIT has a 30-day SEC yield of 3.45% and is down 4.06% year-to-date.
For more information on corporate debt, visit our corporate bonds category.