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.”
VCIT has an average duration of 6.4 years and an average effective maturity of 7.5 years. The ETF’s yield to maturity is 3.8 years. VCIT charges just 0.07% per year, or $7 on a $10,000 investment, making it cheaper than 91% of competing strategies.
“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.
For more information on corporate debt, visit our corporate bonds category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.