Posts tagged Vanguard

Bonds can be set to mature in a wide range of time, from a few months to one hundred years.

Bonds that last under one year are short-term bonds. They are safest but, because of that, have the lowest coupon rates.

Bonds that mature in longer than ten years are long-term. They pay the highest interest rates but have the greatest risks. Sometime over the next decade, interest rates can go much higher, bringing the bond’s value down. And of course in over ten years there’s a greater risk a company may go from financially successful to bankruptcy.

Therefore intermediate-term bonds that mature in one to ten years are generally considered the best possible trade-off between yield and risk.

Because corporations have no authority to tax people, corporate bonds are considered riskier than federal and municipal bonds. Therefore they must pay higher interest rates than governments.

Historically, however, companies with investment grade credit ratings have low rates of default. (Below investment-grade, or “junk,” bonds are a different story. )

Therefore intermediate-term corporate bonds issued by companies with investment-grade credit ratings are the best available balance between yield and risk.

However, it’s not easy for ordinary small investors to buy such bonds. The bond market is not liquid or transparent as the stock market is. Bond brokers are set up to deal with institutions with millions of dollars to invest. They charge ordinary people exorbitant commissions.

However, everyone can now buy shares of the Vanguard Intermediate-Term Corporate Bonds exchange traded fund VCIT.

Most ETFs track an index. Because there is no index that singles out these kinds of bonds (there’re thousands outstanding), VCIT buys a representative sample. It uses sampling techniques to balance key risk factors and other characteristics of the underlying bonds, including duration, cash flow, and quality. It also limits exposure to sector and sub-sector risk.

VCIT also attempts to balance bonds for what’s termed “callability. ” This is the right of bond issuing companies to “call in” bonds. They often choose to do when market interest rates go down lower than the bond’s coupon rate. Bond investors don’t like this feature, because the companies save money by issuing new bonds at the new, lower market rates of interest.

As with all Vanguard ETFs and mutual funds, the expense ratio is kept low. Just 0. 15%.

VCIT just started November 19, 2009. Before that, the only intermediate-term bond ETFs available bought government bonds as well as corporate bonds. VCIT is for those investors seeking only the higher yields of corporate bonds.

Its number of bond holdings is 189. The average yield to maturity is 5. 2%, and the average coupon rate is 6. 4%. Average maturity is 7. 8 years. All holdings mature in from five to ten years.

Credit quality of the bonds ranges from Aaa to Baa. The average is A2/A3.

The dividend distribution schedule is monthly.

The industries included are: Financial (38. 8%), Industrial (50. 2%), and Utilities (11. 3%).

VCIT is managed by Gregory Davis and Joshua C. Barrickman. It trades on the NASDAQ exchange.    

Therefore VCIT offers investors the opportunity to conveniently, safely, and inexpensively profit from corporate bond yields that are higher than those available from government bond issuers.