Trending
Broadly speaking, it’s been an impressive year for investment-grade corporate bonds and the related exchange trade funds. As of Aug. 22, the widely followed Markit iBoxx USD Liquid Investment Grade Index is up 3.91% year-to-date, a slight advantage over the Bloomberg U.S. Aggregate Bond Index.
That’s a positive for advisors and clients alike because income remains front-and-center in the retirement conversation and the less exotic income options are likely to appeal to a broader swath of clients. Fortunately, it’s currently easy to identify a variety of corporate bond ETFs yielding in the neighborhood of 5%. With a 30-day SEC yield of 4.97%, the Vanguard Intermediate-Term Corporate Bond ETF (VCIT) merits a place in that conversation.
As its name implies, VCIT is an intermediate-term fund. It’s nearly 2,2200 holdings have maturities ranging from five to 10 years and the average duration is 6.1 years. That status highlights some potential advantages for VCIT investors. First, intermediate-term bonds are historically less correlated to equities than long-dated bonds, implying an ETF like VCIT can credibly reduce portfolio correlations.
Second, high-quality intermediate-term debt might prove somewhat resilient should the Federal Reserve not lower interest rates next month. Even if the Fed pares rates as expected, VCIT has more than adequate leverage to that scenario because its starting yield is relatively high by historical standards.
VCIT Has Impressive Long-Term Track Record
VCIT, which turns 15 years old in November, is home to $48.6 billion in assets under management, easily making it one of the largest ETFs in this category. As is par for the course with so many Vanguard ETFs, it’s also one of the least expensive.
VCIT’s annual fee of 0.04%, or $4 on a $10,000 investment, is well below the category average of 0.56%, according to issuer data. That low fee has played a role in the ETF’s strong long-term track record.
“Differences between this portfolio and the category average have helped its category-relative performance,” notes Morningstar analyst Lan Anh Tran. “The exchange-traded fund outperformed the category average by 34 basis points annualized from its 2009 inception through July 2024 with similar volatility. The fund’s risk-adjusted performance, as measured by its Sharpe ratio, has been comparable to the category average.”
One thing to note regarding VCIT’s long-term performance is that the ETF – and this isn’t particularly surprising – has a penchant for performing well when credit spreads are narrow and lagging when those spreads widen.
“The fund outpaced its category average by 1.45 percentage points during the coronavirus shock in 2020 from Feb. 20 through March 23. Similarly, it beat the average by 2.9 percentage points between June 2015 and February 2016 as slumping commodities prices drove spreads higher,” adds Tran.
VCIT Checks a Lot of Important Boxes
With reliable, lower-risk income still a priority for many clients and with plenty of others perhaps still too heavily allocated to equities, advisors can find a broad, receptive audience for VCIT.
The increasingly aware and vocal low-fee crowd is sure to see merit in this ETF. Likewise, VCIT’s strong credit quality (no junk holdings, 95.4% in A or BBB bonds) could indicate the fund can be alternative for client portfolios that are perhaps too heavily allocated to municipal bonds or Treasurys.