(PUB) Investing 2015

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6 • Fund Family Shareholder Association
government-focused funds— Short-
Term Treasury, Short-Term Federal
and Short-Term Government ETF—
as money market funds without a
stable price because of their low, low
yields. That’s still pretty much the
case, and while investors do earn
enough yield here to distinguish them
from money market funds, I still rate
each one a Sell.
Yes, your default risk is essential-
ly zero with the three government-
concentrated bond funds, but consider
what happens if you are willing to take
on some corporate bond exposure. As
you can see in the table on page 5,
with Ultra-Short-Term Bond, you have
half the duration, 1.0 years versus 1.9
to 2.3 years, but you give up little, if
anything at all, in yield compared to
the government funds. Yet, if you’ve
already decided that you are com-
fortable with the interest-rate risk of
short-term bonds, well, you’ll pick up
more income with any of the following
funds.
Short-Term Bond Index, which
tracks the Barclays 1–5 Year Govern-
ment/Credit index, is a step in the right
direction. But with roughly two-thirds
of the portfolio in government bonds,
the index fund’s 1.13% yield still lags
well behind Short-Term Investment-
Grade. Add in that it has a slight-
ly higher duration of 2.7 years than
its actively managed siblings, which
means it will be a bit more sensitive to
changes in interest rates, and you can
see why I rate this fund a Hold.
Short-Term Corporate ETF isn’t
a bad choice for index and ETF adher-
ents. The fund tracks the Barclays
U.S. 1–5 Year Corporate index and
hence holds only corporate bonds—
where actively managed Short-Term
Investment-Grade will have some expo-
sure to government-backed bonds. As
a result, the ETF’s risk is a bit higher.
While the active fund took a 7.6% hit
during the 2008 credit crisis, the index
this ETF tracks fell 9.7%, in large mea-
sure because it had no shock absorber in
government bonds. Additionally, I have
a lot of respect for Vanguard’s bond
team and so lean toward active manage-
ment when I can.
Short-Term Investment-Grade has
long been my choice for a higher-
yielding shock absorber and cash sub-
stitute in my Model Portfolios. The
2008 credit market debacle tested
this claim—and my faith in the fund.
Because it doesn’t invest more than a
smidgen in government-backed securi-
ties (just over 10% today), Short-Term
Investment-Grade took a beating during
that brief episode—losing 7.6% at its
worst. Its prior worst was a decline of
2.2%. But its recovery from the credit
crisis was swift, my confidence was
restored, and I remain a huge fan.
Intermediate-TermTreasury Sell.
Intermediate-Term Gov’t ETF Sell.
Intermediate-Term Bond Idx. Hold.
Intermediate-Term Corp. ETF Buy.
Intermediate-Term Invest.-Gr. Buy.
Intermediate-term bonds (remember,
we talked about this in the August
issue) have been tough to beat when
you consider both bond risks and bond
returns. Over rolling three-, five- and
10-year periods, intermediate-maturity
funds have generated 70% to 80% of
the return you’d earn from a long-term
fund with only half the risk—not a bad
trade-off.
However, I would again steer clear
of Vanguard’s government-oriented
funds, Intermediate-Term Treasury
and Intermediate-Term Government
ETF. As with their short-term coun-
terparts, there’s nothing really wrong
with these funds, but the yields here are
really low at only 1.44% and 1.54%,
respectively. That is below the 1.83%
yield on Short-Term Investment Grade,
and with these funds you have at least
twice the interest-rate risk. I just don’t
see the value.
Similar to its shorter-maturity sib-
ling, Intermediate-Term Bond Index
is made up of a mix of Treasury, gov-
ernment agency and corporate bonds.
The fund tracks the Barclays 5–10
Year Government/Credit index, and
differs from Total Bond Market in that
there are no mortgage bonds here, so
you aren’t getting an all-encompassing
“bond market” index fund. If you are
going for a broad index, why not pick
the broadest one available?
So, as with short-term funds, my top
intermediate-term picks are the corpo-
rate-oriented bond funds—Interme-
diate-Term Investment-Grade and
Intermediate-Term Corporate ETF.
Yielding 2.77% and 3.51%, respec-
tively, both funds offer a nice pickup
over Intermediate-Term Treasury’s
1.44% yield. Of the two, the actively
managed Intermediate-Term Invest-
ment-Grade is, again, my top pick. I
have a lot of confidence in Vanguard’s
bond team to navigate the market and
sidestep the blow-ups that the index
can’t avoid.
Total Bond Market Hold.
The world’s largest bond fund fits
in the intermediate-term category, but
I think it deserves its own write-up.
Not only is it a popular choice among
investors who are looking for one-
stop bond exposure, it’s also a staple
in Vanguard’s Target Retirement and
STAR LifeStrategy funds, as well as its
529 Plans and balanced annuity funds
of funds. In addition, it’s often the only
broad bond market option for investors
in corporate 401(k) plans.
Investors here are essentially buy-
ing the entire bond market at rock-
bottom cost. The portfolio holds over
7,600 positions in an effort to track
an index of nearly 9,500 bonds, the
Barclays U.S. Aggregate Bond index.
Its assets are spread among corpo-
rate bonds (about 30%), Treasury and
agency bonds (45%), mortgage-backed
securities (20%) and foreign bonds
(5%). After more than two decades,
the fund has proven a worthy competi-
tor to many actively managed funds,
and its worst decline was a 5.8% loss
over seven months in 1987, which was
recovered in four months.
This is a fine fund. However, the
portfolio’s large allocation to Treasury
and mortgage-back bonds has me con-
cerned for the future. As I mentioned
at the outset, given how low yields
are today, I don’t see how the fund
can repeat its performance of the past
decades in the years ahead. I think the
investment-grade option will give inves-
tors the biggest bang for their bucks
over the next few years.
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