VFSUX Bond Fund Chasing Yield?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
Topic Author
billyo44
Posts: 100
Joined: Wed Nov 12, 2014 10:05 am
Location: Husker Nation

VFSUX Bond Fund Chasing Yield?

Post by billyo44 »

We have owned the Vanguard Short-Term Investment Grade Fund Admiral Shares for several years. When we first purchased shares I don't recall the level of U.S. Gov't bonds being in the 11% range (thought the percentage used to be much higher), and the percentage of BBB rated bonds not being anywhere close to the current 45% allocation (thought they were at a much lower percentage of the holdings). I am certainly not a bond aficionado by any means and hold them for the reasons most Bogleheads do.
According to Vanguard's Risk Potential Rating this fund is 'Conservative' meaning less risk, less reward. It also states..."Credit risk should be low to moderate for the fund because it invests primarily in bonds that are considered high- and medium-quality."
Questions:
1) Is this a trend in the bond fund business...to take on more risk in an effort to obtain at least some yield is this low interest rate environment?
2) Isn't a BBB rating on the lower rung of Investment grade ratings?
3) Do most investors understand the potential risks if bond fund managers are reaching for yield?

I believe many investors feel 'safe' when they simply hold an investment labeled a 'bond'...but personally we have attempted to shore up this potential additional risk by buying a short-term Treasury fund in addition to holding VFSUX.

Thoughts from the Bogleheads bond experts, please?
Independence = Financial assets working for you versus you working for them. | "Own an Index Fund, Get a Life Outside of Finance, and Relax"...John C. Bogle
User avatar
Beensabu
Posts: 5657
Joined: Sun Aug 14, 2016 3:22 pm

Re: VFSUX Bond Fund Chasing Yield?

Post by Beensabu »

I personally put great stock in acronyms and the "hidden messages" they give you. SUX would give me pause.

If you don't want to be weird about it like me, think of it as: IF (edit to add IF, because you could be using them to shorten overall duration of fixed income) short-term bonds are for upcoming spending needs, they should be as safe as possible. That's not corporate, even if investment-grade.

But yeah, corporate heavy bond funds are all likely reaching for yield to some extent or another. What else are they going to do?

Some people won't go below A. Some won't go below Baa/BBB (that's the bottom rung of "investment grade").
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
User avatar
jeffyscott
Posts: 13486
Joined: Tue Feb 27, 2007 8:12 am

Re: VFSUX Bond Fund Chasing Yield?

Post by jeffyscott »

I think it is just a reflection of the changing make up of the corporate bond market, so more due to trends in the bond issuance business than bond fund management.

Image
https://www.blackrock.com/institutions/ ... rate-bonds

I don't think the fund ever had a lot in treasuries (or mortgage bonds), I thought it has always been nearly a corporate bond index fund?
000
Posts: 8211
Joined: Thu Jul 23, 2020 12:04 am

Re: VFSUX Bond Fund Chasing Yield?

Post by 000 »

Perhaps yet another example of chasing risk in an attempt to increase absolute return at a time when absolute return offered by 'safe' assets is very low. Ironically this behavior - absolute return normalizing - may increase risk at the worst times, yet will likely continue as long as the everything bubble does.

As always it depends on what else you own but I wouldn't consider ~45% BBB bonds to be a low risk investment.
UpperNwGuy
Posts: 9479
Joined: Sun Oct 08, 2017 7:16 pm

Re: VFSUX Bond Fund Chasing Yield?

Post by UpperNwGuy »

Why not just hold VSCSX, Vanguard's Short-Term Corporate Bond Index Fund? If you want Treasuries, hold VSBSX, Vanguard's Short-Term Treasury Index Fund. If you want some of each, hold a mix of the two funds.

The reason I don't hold actively managed funds is precisely because I can't predict the whims of the managers.
User avatar
sperry8
Posts: 3065
Joined: Sat Mar 29, 2008 9:25 pm
Location: Miami FL

Re: VFSUX Bond Fund Chasing Yield?

Post by sperry8 »

Not sure why one would take any risk to earn .96% yield. :shock:
BH Contests: 23 #89 of 607 | 22 #512 of 674 | 21 #66 of 636 |20 #253/664 |19 #233/645 |18 #150/493 |17 #516/647 |16 #121/610 |15 #18/552 |14 #225/503 |13 #383/433 |12 #366/410 |11 #113/369 |10 #53/282
Northern Flicker
Posts: 15363
Joined: Fri Apr 10, 2015 12:29 am

Re: VFSUX Bond Fund Chasing Yield?

Post by Northern Flicker »

It's an actively managed corporate bond fund. I would expect it to hold close to zero govt bonds as the default case. It must hold at least 80% short-term corporate bobds to satisfy the requirements for the portfolio specified in the prospectus.

My guess is that the managers balance the allocation to govt bonds against the average credit quality of the corporate bond portfolio they choose to hold.

If you want to track a short-term bond index that will ensure holding the index mix of treasuries and corporate credit, you could hold VBIRX, but you will get a lower yield.
Northern Flicker
Posts: 15363
Joined: Fri Apr 10, 2015 12:29 am

Re: VFSUX Bond Fund Chasing Yield?

Post by Northern Flicker »

sperry8 wrote: Sun Oct 17, 2021 10:04 pm Not sure why one would take any risk to earn .96% yield. :shock:
Maybe because the risk-free rate is still lower?
User avatar
HanSolo
Posts: 2313
Joined: Thu Jul 19, 2012 3:18 am

Re: VFSUX Bond Fund Chasing Yield?

Post by HanSolo »

billyo44 wrote: Sun Oct 17, 2021 12:51 pm 1) Is this a trend in the bond fund business...to take on more risk in an effort to obtain at least some yield is this low interest rate environment?
Yes, I've been seeing signs of that. I posted about "bond quality drift" in another thread, where Vanguard's Ultra-Short and Intermediate-Term Investment-Grade funds are mentioned. I don't think you're imagining things.
2) Isn't a BBB rating on the lower rung of Investment grade ratings?
It's considered the "lowest" rung of investment grade. Also known as "medium quality". Below BBB is "junk".
3) Do most investors understand the potential risks if bond fund managers are reaching for yield?
I think I do. As a result, I avoid funds that have one-quarter or more of their bond holdings at BBB or below (as VFSUX does).
Strategic Macro Senior (top 1%, 2019 Bogleheads Contest)
User avatar
sperry8
Posts: 3065
Joined: Sat Mar 29, 2008 9:25 pm
Location: Miami FL

Re: VFSUX Bond Fund Chasing Yield?

Post by sperry8 »

Northern Flicker wrote: Sun Oct 17, 2021 10:21 pm
sperry8 wrote: Sun Oct 17, 2021 10:04 pm Not sure why one would take any risk to earn .96% yield. :shock:
Maybe because the risk-free rate is still lower?
Barely. I've got FDIC insured bank accounts paying .8%. For the extra .16% why take risk? As Swedroe used to say... picking up pennies in front of a steamroller isn't a wise decision.
BH Contests: 23 #89 of 607 | 22 #512 of 674 | 21 #66 of 636 |20 #253/664 |19 #233/645 |18 #150/493 |17 #516/647 |16 #121/610 |15 #18/552 |14 #225/503 |13 #383/433 |12 #366/410 |11 #113/369 |10 #53/282
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: VFSUX Bond Fund Chasing Yield?

Post by JoMoney »

FWIW, It is an active fund. If one was looking for a market index based fund for short term corporates, that didn't have vagerys not explained by whatever the market is doing, there is a lower cost index fund for that.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
User avatar
iceport
Posts: 6054
Joined: Sat Apr 07, 2007 4:29 pm

Re: VFSUX Bond Fund Chasing Yield?

Post by iceport »

billyo44 wrote: Sun Oct 17, 2021 12:51 pm We have owned the Vanguard Short-Term Investment Grade Fund Admiral Shares for several years. When we first purchased shares I don't recall the level of U.S. Gov't bonds being in the 11% range (thought the percentage used to be much higher), and the percentage of BBB rated bonds not being anywhere close to the current 45% allocation (thought they were at a much lower percentage of the holdings). I am certainly not a bond aficionado by any means and hold them for the reasons most Bogleheads do.
According to Vanguard's Risk Potential Rating this fund is 'Conservative' meaning less risk, less reward. It also states..."Credit risk should be low to moderate for the fund because it invests primarily in bonds that are considered high- and medium-quality."
Questions:
1) Is this a trend in the bond fund business...to take on more risk in an effort to obtain at least some yield is this low interest rate environment?
2) Isn't a BBB rating on the lower rung of Investment grade ratings?
3) Do most investors understand the potential risks if bond fund managers are reaching for yield?

I believe many investors feel 'safe' when they simply hold an investment labeled a 'bond'...but personally we have attempted to shore up this potential additional risk by buying a short-term Treasury fund in addition to holding VFSUX.

Thoughts from the Bogleheads bond experts, please?
billyo44,

I'm not a bond expert, but I, like you, also hold bonds "for the reasons most Bogleheads do." At least I think so. According to the wiki, "Bonds are typically used to stabilize the value of a portfolio and/or produce a stream of income." For me, it's mostly to mitigate the risk of steep portfolio losses due to highly volatile equities.

If that's the purpose of holding bonds, I'm really struggling to see why you are so concerned about the risks of a bond fund like the Vanguard Short-Term Investment Grade Fund. Doesn't it function pretty much as you'd expect it to?

(Without seeing documentation, I don't blindly accept that the fund risk profile has drifted much over the years.)

Sure, the investment-grade short term fund might be more risky than a fund with more federal government bonds, like Vanguard Short-Term Bond Index Fund (VBIRX). But how much more risk is involved? I think some context is missing here, that the relative degree of added risk of holding more short term corporate bonds is being exaggerated. In other words, I think you and many others in this thread are overreacting and being unnecessarily melodramatic about the "steamroller" of investment-grade ST corporate bonds.

Yes, VFSUX was a little more volatile than VBIRX in the last two crashes, for example. But notice how relatively short-lived the effects were:

Image

More importantly, however, notice how that volatility compares to the volatility of the equity market:

Image

If you ask me, if the typical goal is "to stabilize the value of a portfolio," VFSUX fills that role just fine. I completely agree with Taylor Larimore's approach to bonds in a portfolio: just about any good quality bond fund will do. There's no need to get all worked up about minor shades of risk on the bond side of the portfolio.

If the volatility of VFSUX does bothers anyone, there are always safer options available. But the existence of safer options, relative to VFSUX, does not make VFSUX an inherently high risk asset.
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
Northern Flicker
Posts: 15363
Joined: Fri Apr 10, 2015 12:29 am

Re: VFSUX Bond Fund Chasing Yield?

Post by Northern Flicker »

sperry8 wrote: Mon Oct 18, 2021 6:38 am
Northern Flicker wrote: Sun Oct 17, 2021 10:21 pm
sperry8 wrote: Sun Oct 17, 2021 10:04 pm Not sure why one would take any risk to earn .96% yield. :shock:
Maybe because the risk-free rate is still lower?
Barely. I've got FDIC insured bank accounts paying .8%. For the extra .16% why take risk? As Swedroe used to say... picking up pennies in front of a steamroller isn't a wise decision.
Are those bank accounts available in an IRA? Are they CDs or money market accounts?
User avatar
Electron
Posts: 2658
Joined: Sat Mar 10, 2007 7:46 pm

Re: VFSUX Bond Fund Chasing Yield?

Post by Electron »

Vanguard has six short term taxable bond funds if you exclude the inflation protected securities fund. You can select the average credit quality that meets your needs.

I believe the short term fund with the highest risk in terms of credit quality and industry concentration is the short term corporate bond index fund.

As others pointed out, the highest quality short term funds performed much better than the funds holding a lot of corporate bonds in 2008 and early 2020.

A forum search will turn up many excellent threads discussing these funds.
Enjoying the Outdoors
Chuck
Posts: 2505
Joined: Thu May 21, 2009 12:19 pm

Re: VFSUX Bond Fund Chasing Yield?

Post by Chuck »

Wow, VFSUX has been one of my favorite funds for a long time. So much so, I haven't checked the yield recently, so I didn't realize it had gotten so low. Too bad I can't re-balance into I-Bonds.
User avatar
HanSolo
Posts: 2313
Joined: Thu Jul 19, 2012 3:18 am

Re: VFSUX Bond Fund Chasing Yield?

Post by HanSolo »

iceport wrote: Mon Oct 18, 2021 12:47 pm (Without seeing documentation, I don't blindly accept that the fund risk profile has drifted much over the years.)
Nobody suggested blindly accepting anything. One should also not blindly accept that significant quality drifts don't happen in actively-managed bond funds.

In addition, the thread I cited above provides evidence that it does happen, at least in the cases of the funds mentioned... both of which have the same fund managers as VFSUX.
I think some context is missing here, that the relative degree of added risk of holding more short term corporate bonds is being exaggerated.
Nothing was exaggerated. It's simply an objective fact that bond funds have their own quality attributes. With that understanding, there's nothing wrong with preferring one over the other.
Yes, VFSUX was a little more volatile than VBIRX in the last two crashes, for example. But notice how relatively short-lived the effects were:
That's fine for strict buy-and-hold, but some people rebalance against equities, perhaps during a crash. For that purpose, VBIRX is a better choice than VFSUX. (Personally, I might prefer to use an intermediate or long-term Treasury fund for that purpose.)

Another thing to consider is why VFSUX went down during certain equity bear markets, like in 2008 and 2020. It seems that some were concerned about a severe crisis in corporate debt. Luckily, that turned out not to be. But we can't guarantee that next time. It's perfectly fine if someone wants to take on that risk and go with a lower-quality bond fund (e.g., corporate, or even high-yield). It's also legitimate to not take that risk and go with higher quality (e.g., Treasury).

In other words, I see nothing wrong with knowing what's in the funds, having a preference, and then making an informed choice.
Strategic Macro Senior (top 1%, 2019 Bogleheads Contest)
Post Reply