In the current interest rate environment, many fixed income investors are flocking to short-term bond funds while eschewing long-date fare. Sometimes, the middle part of the curve is appropriate to consider as well.
Corporate bond investors can do just that with 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.
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.
Investors Love ‘VCIT’ ETF
At the end of July, VCIT had $19 billion in assets under management. Year-to-date, the ETF has taken in $1.27 billion in new assets, good for one of the largest hauls of any corporate bond ETF.
In a rising rate environment, the price of older bonds with lower rates will fall since these older debt securities appear less attractive and traders would demand a discount on the older lower-yielding debt. On the other hand, new bonds are issued at the newer and higher rates, so investors would be less inclined to hold older debt securities with less attractive yields. As a result, the less appealing older bonds will see prices fall in response to the diminished demand.
Related – Don’t Sit Idle in Cash: Consider Investment-Grade Corporate Bond ETFs
In the current rising rate environment, a number of financial advisors are suggesting investors to treat fixed income like the sun and limit prolonged exposure. In this case, as the Federal Reserve’s predilection for raising interest rates does not appear to be changing anytime soon, it’s best to take advantage of these short-term rate adjustments by limiting duration.
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.
For more information on corporate debt, visit our corporate bonds category.