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The Independent Adviser for Vanguard Investors
•
September 2015
•
5
FOR CUSTOMER SERVICE, PLEASE CALL
800-211-7641
when it comes to bond funds, Vanguard
does manage a significant portion of
its in-house assets actively. Where it
doesn’t manage the assets on its own,
the firm has partnered with only one
sub-adviser, Wellington Management.
That said, there are some areas of
the bond market I prefer over others,
and some that I would avoid entirely. In
short, I prefer corporate bonds to gov-
ernment-backed bonds and would stay
away from bonds with long maturities,
where the risks often aren’t outweighed
by the returns.
To accompany my commen-
tary, I created the table below to help
you compare Vanguard’s bond funds
side-by-side. I’ve included some of
the same information you’ll find in
the
Performance Review
, such as my
advice, average maturity and yield, but
I also added data showing broad alloca-
tions as well as measures of risk.
Ultra-Short-Term Bond
Buy.
The name of the game here is low, low
risk with more yield than you’ll find on a
money market fund.
Ultra-Short-Term
Bond
is young, launching in February of
this year, but so far is executing its game
plan nicely. The fund’s price has fluctu-
ated between $9.99 and $10.01, and it
currently sports a yield of 0.63%, having
distributed a total of $0.02 income per
share since its launch. That’s certainly not
much in the way of income, but it is 250
times better than the $0.00008 a share
that
Prime Money Market
distributed
over that stretch.
While I don’t believe you can ever find
a suitable substitute for a money market
fund when it comes to cash that you
intend to spend in the near future—and
Ultra-Short-Term Bond is not a money
market fund—I do think that investors
who can handle small changes in price
may indeed find this a good alternative.
Short-TermTreasury
Sell.
Short-Term Federal
Sell.
Short-Term Government ETF
Sell.
Short-Term Bond Index
Hold.
Short-Term Corporate ETF
Buy.
Short-Term Invest.-Gr.
Buy.
In the past, I have recommended that
short-duration funds can serve just as
well as, if not better than, money market
funds in your portfolio, particularly if
it’s money that you won’t be spending
tomorrow. I believe most investors are
well-advised to own both a money fund
for day-to-day spending and a short-
term bond fund for liquid assets that
aren’t necessarily needed right away and
can stand to be subjected to a bit more
risk for a lot more total return over time.
This is still my recommendation; I just
don’t believe all of Vanguard’s short-
term funds are equally up to the task.
It wasn’t that long ago that I de-
scribed Vanguard’s three short-term
The Many Shapes and Sizes of Vanguard’s Bond Funds
—————— STATS ——————
—————— SECTOR BREAKOUT —————— —— RISK ——
Advice
Avg. Maturity
(years)
Duration
(years) SEC Yield
Treas./
Agency
Gov’t
MBS* Credit** Foreign Cash MCL
Date
Ultra-Short-Term Bond
Buy
1.1
1.0 0.63% 22% 0% 53% 1% 24% -0.1% Jul-15
Short-Term Funds
Short-Term Treasury
Sell
2.5
2.3 0.60% 100% 5% 0% 0% -5% -2.2% Apr-94
Short-Term Federal
Sell
2.7
2.3 0.74% 89% 16% 0% 0% -4% -2.5% May-94
Short-Term Government ETF
Sell
1.9
1.9 0.60% 99% 0% 1% 0% 0% -1.5% Apr-94
Short-Term Bond Index
Hold
2.8
2.7 1.13% 66% 0% 26% 8% 0% -1.8% May-04
Short-Term Investment-Grade
Buy
3.1
2.6 1.83% 11% 0% 82% 7% 0% -7.6% Nov-08
Short-Term Corporate ETF
Buy
3.0
2.8 1.98% 0% 0% 100% 0% 0% -9.7% Oct-08
Intermediate-Term Funds
Intermediate-Term Treasury
Sell
5.8
5.3 1.44% 100% 5% 0% 0% -4% -6.5% Nov-94
Intermediate-Term Government ETF
Sell
5.6
5.2 1.54% 100% 0% 1% 0% 0% -4.5% Jul-03
Intermediate-Term Bond Index
Hold
7.2
6.5 2.56% 52% 0% 41% 8% 0% -8.9% Oct-08
Total Bond Market Index
Hold
8.0
5.7 2.12% 45% 17% 32% 7% 0% -5.8% Sep-87
Intermediate-Term Investment-Grade
Buy
6.4
5.5 2.77% 7% 0% 90% 3% 0% -14.2% Oct-08
Intermediate-Term Corporate ETF
Buy
7.5
6.4 3.51% 0% 0% 100% 0% 0% -17.7% Oct-08
Long-Term Funds
Long-Term Treasury
Sell
24.9
16.3 2.57% 99% 5% 0% 0% -4% -16.7% Dec-13
Long-Term Government ETF
Sell
24.6
16.9 2.70% 100% 0% 0% 0% 0% -16.1% Dec-13
Long-Term Bond Index
Sell
24.3
14.7 4.01% 37% 0% 51% 12% 0% -11.9% Oct-08
Long-Term Investment-Grade
Hold
23.1
13.1 4.09% 3% 0% 94% 2% 1% -16.8% Oct-08
Long-Term Corporate ETF
Hold
24.0
13.6 4.84% 0% 0% 100% 0% 0% -22.5% Oct-08
Specialty Funds
Short-Term Inflation-Protected Index
Hold
2.7
2.6 0.17% 100% 0% 0% 0% 0% -8.0% Nov-08
Inflation-Protected Securities
Hold
8.5
8.1 0.27% 99% 0% 1% 0% 0% -12.5% Oct-08
GNMA
Hold
6.7
4.3 2.22% 2% 96% 2% 0% 0% -12.3% Sep-81
Mortgage-Backed Securities ETF
Hold
6.4
4.1 1.52% 0% 98% 2% 0% 0% -4.0% Apr-94
High-Yield Corporate
Buy
6.5
4.3 5.60% 2% 0% 98% 0% 0% -28.9% Oct-08
Extended Duration Treasury ETF
Sell
25.1
24.7 2.95% 100% 0% 0% 0% 0% -37.0% Mar-10
Emerging Markets Gov’t Bond Index
Buy
10.4
6.4 4.67% 0% 0% 0% 100% 0% -34.5% Aug-98
Total International Bond Index
Hold
9.2
7.9 0.98% 0% 0% 29% 71% 0% -6.3% Aug-94
*MBS is shorthand for mortgage-backed securities (see page 7 for details on MBS).
**Credit is a combination of Corporate (Finance, Industrial and Utilities), Asset-Backed, Commercial MBS and Other.
Maturity, SEC Yield and Risk data as of 8/31/15. All other data as of 7/31/15.
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