We have qualitatively reviewed this strategy and reaffirmed its Above Average People and Above Average Process ratings. Vanguard Long-Term Corporate Bond ETF boasts a well-diversified, market-value-weighted portfolio and a rock-bottom fee. It’s a solid option for long-term U.S. investment-grade corporate bonds. The following text is from Feb. 27, 2023.

The fund tracks the market-value-weighted Bloomberg US 10+ Year Corporate index, which includes U.S. investment-grade corporate bonds with at least 10 years remaining to maturity. Market-value weighting limits turnover and lowers transaction costs by investing in the largest issues. The breadth of the portfolio's holdings effectively diversifies away the credit risks of any individual issuer, giving the fund an advantage over category peers with a higher concentration of holdings.

Diversification reduces the fund's exposure to any one issuer, but it still courts significantly more credit risk than category peers in the long-term bond category. Entering February 2022, nearly 90% of its assets were invested in corporate debt rated A or BBB, while the corresponding figure for its average category rival was closer to 60%. That's because many peers invest in a variety of sectors in addition to corporate bonds, including safer issuances like Treasuries and agency mortgage-backed securities. Entering February 2023, category peers held just 51% of their portfolio in corporate bonds.

This fund takes on more interest-rate risk than its average category peer, as well. As of January 2023, its effective duration was 13.3 years, about 1.8 years longer than the category average. Market-value weighting means the fund's duration could fluctuate based on issuing activity. But the main culprit of the fund's above-average interest-rate risk is its mandate to invest only in bonds with more than 10.0 years remaining to maturity. Other category funds aren't required to follow such strict rules, leading the average fund to hold over 18% of its portfolio in bonds with less than 10.0 years to maturity.

Exposure to credit and interest-rate risk notwithstanding, this strategy accurately reflects the composition of the long-term investment-grade corporate bond market. Its annual fee is 23 basis points cheaper than the category average, making it a compelling option.

While annual fees are cheap, buyers of this strategy's mutual fund share classes are subject to a 1% purchase fee intended to minimize the impact of transaction costs from investors moving in-and-out of the fund. This benefits current fundholders at the expense of new investors. The exchange-traded fund version of this strategy is not subject to the purchase fee.

Analyst Rating

Diversified long-term corporate bonds at a low cost.

Director

Bryan Armour

We have qualitatively reviewed this strategy and reaffirmed its Above Average Process rating. The following text is from Feb. 27, 2023.

This expansive portfolio of long-term corporate bonds reflects the opportunity set available to active managers while limiting turnover and the associated costs, allowing it to maximize its fee advantage. It merits an Above Average Process Pillar rating.

Above Average

Process

We have qualitatively reviewed this strategy and reaffirmed its Above Average People rating. The following text is from Feb. 27, 2023.

Joshua Barrickman is the named manager on the portfolio. He has worked in investment management at Vanguard since 1999 and managed investment portfolios since 2005. In 2013, he was promoted to head of Vanguard’s bond index group.

Portfolio management at Vanguard is a team effort, so key-person risk is not a concern. Barrickman leads a team of sector specialists and portfolio managers along with an exchange-traded fund team, which helps with ETF basket creation. These managers are also supported by a team of traders who focus on execution, as well as a data team that checks incoming index data and helps the managers prepare for upcoming index changes. These teams free up time for the managers to focus on portfolio construction and index tracking. There’s also a separate risk management team that independently monitors the managers’ performance. Vanguard aligns managers’ incentives with investors’ by tying their compensation and performance evaluation to the fund’s tracking error.

People

The Vanguard Group retains a High Parent rating. 

Mutual ownership, low costs, and a direct-to-investor playbook have helped spur Vanguard's leadership within the United States. Client service missteps notwithstanding, Vanguard over the past decade has grown its market share of U.S. open-end and exchange-traded fund assets at about a 5% annualized clip. At that rate, Vanguard's portion of the U.S. industry will cross 50% around 2035.

True, some competitors can now match or even undercut Vanguard on fees for broad market exposure. But Vanguard's burgeoning advice business could help it keep or even extend that lead. Through Digital Advisor and Personal Advisor Services, Vanguard has built an increasingly compelling ecosystem of advice for investors with simple to complex needs.

Vanguard is also using its advice business to expand overseas, but that's a work in progress. Of Vanguard's USD 7.6 trillion in global assets under management in March 2023, non-U.S. investors owned less than 10%, a figure that has changed little in recent years. Strategic shifts in China and other markets account for the slow pace, including returning money to institutions that had been layering on fees. Vanguard hopes to recoup that money and more by focusing on individual investors and the advisors who serve them. Provided Vanguard sticks to its playbook, its advantages should translate into success abroad, too.

High

Parent

Vanguard Long-Term Corporate Bond ETF

VCLT tracks a market-weighted index of investment-grade fixed-rate corporate bonds with maturities greater than 10 years.

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The demand for corporate bonds is extending beyond the need for yield. As credit quality conditions improve for corporate bonds, they also offer credit risk mitigation in tandem with higher yield versus safe haven government debt.

Higher Credit Quality Increases Demand for Corporate Bonds

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In the first quarter of 2024, fixed income investors turned to investment-grade corporate bond ETFs. The Vanguard Intermediate-Term Corporate Bond ETF (VCIT) pulled in $2.3 billion, while the Vanguard Long-Term Corporate Bond ETF (VCLT) added $1.5 billion.

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A record amount of money has flooded into the U.S. corporate bond markets this year, as investors rush to lock in the highest yields years ahead of the Fed rate cuts.

Time to Invest in Corporate Bond ETFs

A flurry of investor interest is taking place in the corporate bond market. As the central bank reiterated its intention to institute rate cuts after a recent pause, investors could be scrambling for more yield before that proverbial window of opportunity closes.

Corporate Bonds See Heightened Interest Ahead of Rate Cuts

The risk-on sentiment in equities could also be permeating into bonds. According to Reuters, more investors are willing to take on credit risk to attain yield, but there are other exchange-traded fund (ETF) options to consider.

Here's a Long-Term, Higher-Quality Option for Yield

Now is a bad time to buy corporate bonds, especially long-term bonds like those in the Vanguard Long-Term Corporate Bond Index Fund ETF Shares. The yield spread between BAA corporate bonds and Treasury Rates is near its lowest levels in 30 years, indicating high risk-premium of corporate bonds. Additionally, the VCLT ETF is also exposed to credit risk and certain tax headwinds compared to its Treasury counterparts.

VCLT: Corporate Bond Investors Need To Look At This Chart

Bonds are at a tricky juncture with inflation and the Fed's rate cuts. Bullish on duration, but bearish on junk credit. The Vanguard Long-Term Corporate Bond Index Fund ETF Shares offers exposure to the long-term, investment-grade U.S. corporate bond market. The VCLT ETF holds a diversified portfolio of over 2,800 individual holdings, with top holdings including Anheuser-Busch, CVS Health, and Goldman Sachs.

VCLT: High Quality And Worth A Look

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To stimulate economic growth, China is looking to issue bonds with extra long maturity dates or ultra-long bonds. It's a reminder to fixed income investors that options exist in ETFs domestically.

China's Plans Put Long-Term Bonds ETFs in Perspective

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Exchange traded funds, or ETFs, allow investors to very easily and cheaply obtain exposure to a group of stocks. For example, some ETFs focus on stocks within a single country, while others reflect the performance of equities in one sector.

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After mitigating rate risk in the last few years, it might be time for fixed income investors to reach further out on the yield curve. They can do that with long-term bond ETFs.

3 Long-Term Bond ETFs to Consider as Fed Cuts Rates

The anticipation of rate cuts to come this year is making for a busy bond month to start 2024. Now, regional banks are adding to corporate bond sales, according to data from Bank of America.

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While capital markets are expecting rate cuts to come this year, the pace at which they occur and when certainly comes into question. While the Fed continues to mull rates, fixed income investors can consider three specific ETFs from Vanguard to get more yield.

3 ETF Options to Consider While Fed Mulls Interest Rates

The Vanguard Long-Term Corporate Bond ETF has seen its yield to maturity fall below cash for the first time on record. The recent rally in the VCLT has been driven by a drop in long-term bond yields and narrowing credit spreads. The risks outweigh the rewards for the VCLT at present, but still-high real yields suggest it should still outperform US stocks absent a sustained rise in inflation.

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With the prospect of rate cuts this year, companies are feeling emboldened to issue new debt. As such, fixed income investors have myriad opportunities to get exposure via corporate bond ETFs.

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Confidence in the bond markets is fueling a two-month rally in prices as the capital markets brace for rate cuts in 2024. Whether they happen at a furious pace or not is anyone's guess, but the expectation of cuts are providing enough spark for the rally.

2-Month Price Rally Puts Bonds in Play for 2024

Vanguard Long-Term Corporate Bond Index Fund ETF Shares is at a crossroads due to the lack of clarity regarding the interim relationship between the yield curve and credit spreads. Our analysis suggests the curve's level will drop in 2024 while credit and term spreads may rise. However, we do not believe that credit and term premiums will dominate proceedings. Our risk premium outlook is somewhat neutral. However, bottom-up factors such as U.S. interest coverage ratios suggest that VCLT ETF is set to receive fundamental support.

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The recession that many had predicted for the U.S. this year has thus far not happened. In fact, the S&P 500 is up 18% year to date as of November 17.

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Vanguard Long-Term Corporate Bond ETF delivered negative returns in the past 2 years due to aggressive interest rate hikes by the Federal Reserve. The current yield of VCLT is attractive at 6.08%, making it a good time to accumulate shares. Investors should treat any negative spikes in VCLT's fund price as buying opportunities.

VCLT: Attractive Buying Opportunity For Long-Term Investors

With money market funds yielding 5%, many advisors have been leaning on short-term money market funds. And while that 5% is great, what happens if and when that yield goes away?

Lock in Some High Yields for Longer With VCLT

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Fixed-income investors looking for interest rate cuts from the Federal Reserve are still waiting, but that hasn't stopped low-rated bonds from posting strong gains in 2023. Bond investors hoping for encouraging signals from the Federal Reserve that its policy of raising interest rates was ending received mixed news yesterday.

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For many, social security isn't enough to fund their retirement needs. Bonds can help produce another income stream.

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Over the past 12-24 months of rate hikes, short-term and ultra-short-term bond ETFs have served income-seeking investors well. But as interest rates continue to rise, exposures farther out on the curve have begun to offer attractive yields, too.

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Unless corporations are able to pull off the ultimate escape artist trick, they won't be able to get away from higher interest rates, which could put corporate bonds in a precarious position. A MarketWatch report noted a particular Goldman Sachs analysis that addressed the $1.

Corporate Bonds Could Be in a Precarious Position

Long-term bond exchange traded funds (ETFs) can offer fixed income investors higher yield options, and a pair of Vanguard funds cracked a Forbes Advisor Top 10 List of long-term bond ETFs.

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VCLT is an exchange-traded fund that invests in investment-grade corporate bonds. The fund has a long duration of 13.2 years, which means that its price is sensitive to changes in interest rates. With most economists now predicting the July Fed hike to be the last one this cycle, the main risk factor for this fund is off the table.

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