Corporate Bond Exposure on the Cheap

Traditional aggregate bond indexes are usually heavily allocated to U.S. government debt while featuring only token exposure to higher-yielding corporate bonds. In fact, many of these benchmarks are lightly allocated to lower risk, investment-grade corporate debt, meaning investors that want exposure to corporate bonds often need to embrace funds dedicated to that asset class.

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 “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.”

VCIT: Nearly 1,750 Bonds

VCIT offers investors broad-based corporate bond exposure with a portfolio comprised of nearly 1,750 bonds. Credit risk is minimal as about 92% of the fund’s portfolio carries ratings of A or Baa.

“Roughly one third of the portfolio is invested in the financials sector. Its average sector exposure was less than one fourth of the portfolio from 2010 to 2016, according to Morningstar data,” said Morningstar. “Any negative developments in this sector could hurt the fund’s performance. This concentration is mostly driven by large U.S. banks, which have issued a record amount of debt since 2010 to take advantage of low rates and meet the strict post-crisis capital requirements.”