759 / 772
The Independent Adviser for Vanguard Investors
•
December 2015
•
5
FOR CUSTOMER SERVICE, PLEASE CALL
800-211-7641
given that the outflows from GNMA
dwarf the inflows to its ETF sibling,
I’d say this is more a case of investors
moving away from mortgage-backed
bonds in general.
Although the newer bond index
funds haven’t been stealing assets from
their older rivals, they have held their
own when it comes to performance,
with one notable exception. The graphs
to the right show relative performance,
grouping the funds by maturity. In these
charts, a rising line means the newer
bond ETF is outperforming.
Let’s start with the short-maturity
funds. Short-Term Government ETF
and
Short-Term Federal
are com-
parable, and the older fund’s slightly
longer duration and higher yield has
led to steady outperformance. Short-
Term Corporate ETF has held a perfor-
mance and yield advantage over both
Short-Term Bond Index and Short-Term
Investment-Grade. The ETF’s yield
advantage comes from its mandate as
a 100% corporate fund as opposed to
small differences in duration. (I still
prefer the actively managed Short-Term
Investment-Grade fund for its proven
ability to navigate different market envi-
ronments, though for ETF adherents,
the corporate offering is a strong one.)
On the intermediate-maturity side,
Intermediate-TermGovernment ETF
and
Intermediate-Term Treasury
have been very similar in terms of dura-
tion, yield and performance. Turning to
the corporate index fund, the story is
similar to the short-maturity space, as
a yield and performance advantage for
Intermediate-Term Corporate ETF
has resulted from it being a purely cor-
porate bond fund.
We’ve seen a bit more parity among
Vanguard’s long-maturity funds. In
fact, this is the one place where a 100%
corporate bond positioning hasn’t led to
a performance advantage for the index
fund,
Long-Term Corporate ETF
,
versus the actively managed fund,
Long-Term Investment-Grade
. Why?
Well, first,
Long-Term Government
ETF
’s 6.8% average annual return
over the last five years is actually ahead
of Long-Term Corporate ETF’s 6.6%
pace as the rapid decline in interest
rates generated big price gains even
as yields withered, so owning some
government bonds was not a drag
Short-TermBond ETF
Comparison
4/10
10/10
4/11
10/11
4/12
10/12
4/13
10/13
4/14
10/14
4/15
10/15
Rising line = ETF outperforms
0.90
0.92
0.94
0.96
0.98
1.00
1.02
1.04
1.06
1.08
1.10
S-T Gov’t ETF vs. S-T Federal
S-T Corp ETF vs. S-T Bond Index
S-T Corp ETF vs. S-T I-G
Interm.-TermBond ETF
Comparison
4/10
10/10
4/11
10/11
4/12
10/12
4/13
10/13
4/14
10/14
4/15
10/15
Rising line = ETF outperforms
0.94
0.96
0.98
1.00
1.02
1.04
1.06
1.08
1.10
I-T Gov’t ETF vs. I-T Treasury
I-T Corp ETF vs. I-T Bond Idx
I-T Corp ETF vs. I-T I-G
Mortgage-Backed Securities
ETF vs. GNMA
4/10
10/10
4/11
10/11
4/12
10/12
4/13
10/13
4/14
10/14
4/15
10/15
Rising line = ETF outperforms
0.96
0.97
0.98
0.99
1.00
1.01
Long-TermBond ETF
Comparison
4/10
10/10
4/11
10/11
4/12
10/12
4/13
10/13
4/14
10/14
4/15
10/15
Rising line = ETF outperforms
0.92
0.94
0.96
0.98
1.00
1.02
1.04
1.06
L-T Gov’t ETF vs. L-T Treasury
L-T Corp vs. L-T Bond Index
L-T Corp vs. L-T I-G
QUOTABLE
AFTER A RECENT WIN as Fund Manager of the Year by Australia’s
Financial Review Smart Investor
, Vanguard’s Asia-Pacific head of
investments was interviewed about Vanguard’s success in the vast
Pacific markets. Rodney Comegys told the journalist that target-date
funds were hot, exchange-traded funds were hot, and indexing was
hot. And he let it be known that he had once served as an officer on
the nuclear-powered sub the
U.S.S. Archerfish
. “It was a great founda-
tion. A fantastic training ground for young leaders and there was an
enormous amount of technology to master,” he said.
I got a kick out of the article, because Comegys and the article’s
author are both probably unaware of the fact that one of the great-
est active fund managers in Vanguard’s history, and in the entire fund
industry, was a nuclear engineer and lieutenant in the Navy, serving
on the
U.S.S. Ben Franklin
, a nuclear sub. That manager: Ed Owens,
who led
Health Care
from its 1984 inception until his retirement in
December 2012.
So the next time you read something trying to impress you with the
fact that a nuclear sub officer is recommending indexing as an invest-
ment strategy, just remember Ed Owens’ performance legacy, which, I
should add, Jean Hynes is ably extending as the fund’s new leader.
“Dive, Dive, Dive…”
>