Fees on ETFs have been declining in earnest for several years, allowing investors to access multiple asset classes on a cost-effective basis. That includes corporate bonds and ETFs such as the Vanguard Intermediate-Term Corporate Bond ETF (NASDAQ: VCIT).
VCIT, one of the largest 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.
“This fund is one of the lowest-cost options in the corporate-bond Morningstar Category, and it has a strong index-tracking record. But its market-value-weighting approach leads to heavy exposure to financial-services bonds,” said Morningstar in a note out Wednesday.
VCIT, which holds over 1,700 bonds, has an average duration of 6.3 years. Duration measures a bond’s sensitivity to changes in interest rates. The fund’s credit risk is minimal as 92.5% of its holdings are rated A or Baa.
VCIT Composition
“Roughly one third of the portfolio is invested in the financials sector, which is a source of risk. Its average sector exposure has been less than a fourth of the portfolio from 2010 to 2016, but the stake gradually grew to be more than 30% of the fund by the end of 2017,” according to Morningstar. “Any negative developments in this sector could hurt the fund’s performance. This concentration is mostly driven by large U.S. banks. Since 2010, they issued a record amount of debt to take advantage of low rates and meet the strict postcrisis capital requirements.”
Related: Rising Interest Rates and ETF Strategies to Manage Them
VCIT has some differences from rival funds in its category, but its duration risk is comparable.
“While the fund’s sector and credit-rating distribution differs from the category average, its duration-risk profile is similar to the corporate-bond category average. As of June 2018, its duration was 6.4 years, virtually the same as the category average. The fund will likely move in tandem with its category peers when rates move,” notes Morningstar.
Competitors to VCIT include the iShares Intermediate Credit Bond ETF (NASDAQ: CIU) and the X-trackers Investment Grade Bond – Interest Rate Hedged ETF (Cboe: IGIH). Morningstar has a silver rating on VCIT.
For more information on corporate debt, visit our corporate bonds category.