The closing gap in credit spreads after the August 5 sell-off is bringing corporate bonds back into the spotlight. Those looking for an intermediate bond ETF with yield opportunities and a muted credit risk profile should take a closer look at the Vanguard Interim-Term Corporate Bond ETF (VCIT ).
VCIT tracks the Bloomberg U.S. 5-10 Year Corporate Bond Index. It includes U.S.-dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies. The fund is a prime option for those looking to mitigate the rate risk of longer-term bonds while also extracting yield.
The fund’s 30-day SEC yield as of August 16 is just above 5%. To get that extra yield, investors will have to dip into riskier debt, but the fund still manages to maintain its investment-grade focus.
“The fund typically carries around half of its assets in bonds with a BBB credit rating, in line with the Morningstar Category average and market-value-weighted passive category peers,” noted Morningstar research analyst Lan Anh Tran. “It parks most of its remaining assets in bonds rated A. This results in an overweight compared with the category average.”
Furthermore, VCIT’s credit risk profile can withstand volatile markets where widening credit spreads may occur. The most recent scenario was the August 5 sell-off where credit spreads widened in a safe haven scramble to risk-off assets like Treasuries.
“Despite a high stake in bonds rated BBB, the fund has a relatively muted credit risk profile compared with its category peers,” Tran added. “This has provided some protection from widening credit spreads during major credit shocks.”
A Short-Term Bond Option
Investors who want to mitigate rate risk can also opt for short-term bonds. Like VCIT, they can attain the yield in corporate debt via the +Vanguard Short-Term Corporate Bond Index Fund ETF Shares+ (VCSH ). As of August 16, the fund’s 30-day SEC yield is 4.81%.
Per its fund description, VCSH seeks to track the performance of a market-weighted corporate bond index with a short-term dollar-weighted average maturity. It employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. 1-5 Year Corporate Bond Index.
Like VCIT, the fund invests in primarily A and BBB-rated debt for extracting the most yield while still maintaining an investment-grade profile. Of course, the prime difference is shorter maturity dates with VCSH holdings having an average effective maturity of 2.9 years.
Both VCIT and VCSH feature low expense ratios of 0.04%.
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