VIDEO: ETF of the Week: VCHY

Chuck Jaffe: One fund, on point for today. The expert to talk about it. Welcome to the ETF of the Week!

Yes, it’s the ETF of the Week, where we get the latest take from Todd Rosenbluth, the head of research at VettaFi. And at VettaFi.com, you’ll find all the tools you need to be a savvier, smarter ETF investor, and to get more details on the new, newsworthy, trending, and timely ETFs that we talk about here.

Todd Rosenbluth, it’s great to chat with you again.

Todd Rosenbluth: It’s great to be back, Chuck.

Chuck Jaffe: Your ETF of the Week is…?

Todd Rosenbluth: The Vanguard US High-Yield Corporate Bond Index ETF, VCHY.

Chuck Jaffe: The Vanguard US High-Yield Corporate Bond Index ETF! VCHY. Well, this fund, Todd, I think hits every one of those bases that we talked about: new — absolutely; newsworthy — I think so; trending and timely — yeah, I think it’s got that, too! So, is one or more of those the reason why it’s the ETF of the Week?

Todd Rosenbluth: So, we saw at VettaFi that money went back into high-yield bond ETFs in the month of June. The category saw net outflows for the first five months of the year; in June, it recovered. 

VCHY is not necessarily one of those funds that was the beneficiary, because this fund only launched in June. So, Vanguard has been launching actively managed ETFs — that’s been where they’ve been building out their lineup. 

So, it caught my eye when Vanguard offered this fund as a new product. High-yield has been an area where they have not had a product lineup slot filled in, and so that’s pretty interesting. This is low-cost; for people who don’t have high-yield exposure, it could make a lot of sense. So, a Vanguard index-based high-yield ETF—that checked some boxes for me.

Chuck Jaffe: You have been, however, looking mostly at the active funds. This index-driven fund — and the benchmark index has been performing really well, especially when compared to the U.S. Aggregate Index, but you’d expect high-yield to do better — but I’m curious in this case. This is, you know, you and I don’t spend too much time talking about expenses, because you usually will say that while expenses are guaranteed, you’re more focused on performance, et cetera. But expenses here are so low. Is this a case of, “If you can’t beat them, join them”?

Todd Rosenbluth: So, we talk a lot about active ETFs in the new camp of that category, because that’s where a lot of the product development has been happening. So, when an index-based product from a prominent firm launches, that catches my eye. And you’re right: five basis points. That’s the fee for this, which is among the cheapest products around. It actually is not the cheapest, and I don’t know that you should pick the cheapest necessarily within a category — it has to make sense overall. 

Many people are going to own, and do own, Vanguard fixed-income products covering other asset categories. (BND A-) is their aggregate bond strategy. So, it just seems logical to me that people might want to add on an index-based complement to their low-cost core strategies.

Chuck Jaffe: Not picking the lowest cost — I agree completely, but the numbers here are particularly compelling. As you said, it’s not the lowest, but the expense ratio is 0.05%. Here are the interesting statistics: The active high-yield fund and ETF expense average is ten times higher — it’s 0.50%, or 50 basis points. 

The category average is about five times higher — it’s 24 basis points. That is an enormous cost edge! From that perspective, how does an active manager make up that difference? Because, like, I recognize why you like active management, but I’m looking at this in an area where there’s only so much you can do and you’re stretching for yield. 

Like, you know, high-yield is still junk, even though it hasn’t really been junky, and there are a lot of people saying that really the private credit areas are what used to be junk bonds, and junk bonds are now much more in the safe spectrum. But given that high-yield is normally a stretch for yield, is there any way you can justify somebody paying five or ten times to get the exposure?

Todd Rosenbluth: So, this is the awkward part of the conversation, because we might very well be back at some point talking about an active high-yield strategy. So, I want to give people the facts but also the choices. Vanguard offers an active high-yield product — the ticker, which is not my ETF of the Week, but that ticker for folks who want to do their own homework, is (VGHY). And that fund costs 22 basis points. That’s relatively low for active, but is still, as you mentioned, almost five times as expensive. 

With an active high-yield strategy, you’re going to find the potential benefits of the manager taking on less or more credit risk and doing security selection, as opposed to owning the whole suite of the high-yield bond universe in an index-based manner. And so, for folks that are not as familiar with high-yield strategies, you’ll get exposure to mostly double-B and single-B rated securities — so below investment grade — and it’s actually more exposure to double-B than single-B. 

But some managers may want to take on that risk for that higher reward potential during risk-on environments, or taking it off as appropriate, I think. And it’s only a very short amount of time.

But that [5%] yield on VCHY, our ETF of the Week from Vanguard — the index-based product — [5%] is pretty competitive in that space. You’re getting the benefits of the low fee; that’s net of fees. So, it really comes down to how much you want to pay, and do you think value can be added in security selection in the high-yield space.

Chuck Jaffe: This fund is brand new, created just over a month ago. At this point, with what I’ve seen in terms of what’s published about it, it only has about $100,000 in assets. By comparison, by the way, VGHY, the actively managed one, has about $300 million in assets. So, this fund is very new, but it’s Vanguard and it’s an index fund. Is there any reason to worry about this being a new fund?

Todd Rosenbluth: So, I think investors need to be aware that a fund has a short track record. If you’re looking at the trading volume, it’s relatively light. Depending upon how much money you’re planning to put to work, you don’t want to be too much of the overall trading volume, even though new shares can get created. The spreads could widen a little bit, but I’m not concerned.

You’re right, Vanguard has a long history of successfully launching products; they don’t close ETFs. It’s extremely rare that that’s the case. I think we can look to the other Vanguard index-based corporate bond strategies as a reference point as to what this fund could become as investors continue to put money to work over time. So, no, I’m not concerned.

Chuck Jaffe: How does this fund fit into a portfolio? Is this an adjunct to somebody who already has some high-yield exposure? Is this where you’re getting your high-yield exposure? Do you look at this and go, “Well, wait, this benchmark has done a lot better than the Agg. Let me go up the risk scale.” What’s the proper use of this fund?

Todd Rosenbluth: So, I think this can be a nice complement to your core fixed-income exposure. You referred to the Agg — I’ll just use BND as my reference point because that’s the Vanguard Total Bond Market Index ETF, which has no exposure to high-yield. It’s an investment-grade, index-based approach of investment-grade corporate bonds, agencies, and Treasuries, and has no high-yield corporate bond exposure. 

If you don’t own high-yield bond exposure, this could be a way of getting in in a low-cost manner. If you do own high-yield, you might own it in a high-yield mutual fund, and then this could provide the benefit of a lower-cost, more tax-efficient complement. If you have ETF exposure, and you might have a different high-yield bond ETF that’s index-based — if it’s that much more expensive, this can make a lot of sense.

But I just want to remind people: we talked about fees and how there’s a small disparity, often, in fees. If you own a product that costs eight basis points, for example, and this is five — that’s better, but the taxes you’re going to pay to sell a strategy to put a new one in probably don’t make as much sense. I’m not giving tax advice; I’m just saying make sure that if you’re trading out of something and into something, the total exposure makes sense to you.

Chuck Jaffe: It’s VCHY, the Vanguard U.S. High-Yield Corporate Bond Index ETF — a new fund, and already the ETF of the Week from Todd Rosenbluth at VettaFi. Todd, great stuff. Talk to you again next week!

Todd Rosenbluth: Thanks a lot, Chuck.

Chuck Jaffe: The ETF of the Week is a joint production of VettaFi and Money Life with Chuck Jaffe. And yes, I’m Chuck Jaffe. You can check out my hour-long weekday podcast by going to MoneyLifeShow.com, or you can search for it wherever you find your favorite podcasts. 

Now, if you’re searching for more information on your favorite ETFs, or maybe the funds that are going to become your favorite ETFs that we’ve talked about here, go to VettaFi.com, where they’ve got a full suite of tools that will help you become a savvier, smarter investor. They’re on X at @Vetta_Fi. Todd Rosenbluth, their head of research, my guest, is on X as well at @ToddRosenbluth.

The ETF of the Week is here for you every Thursday. Make sure you don’t miss an episode by following along where you find this podcast. We’ll be back next week with another ETF for you to consider. Until then, happy investing, everybody!

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Note: This article was created in part through assistance from AI tools. The content has been thoroughly reviewed and edited by the author.