Vanguard Short-Term Corporate Bond Fund offers a well-constructed portfolio of short-term corporate bonds at a razor-thin expense ratio. Focusing strictly on corporate bonds should position this fund to capture market rallies better than most of its Morningstar Category peers without pushing it too far into risky territory. 
The fund tracks the Bloomberg U.S. 1-5 Year Corporate Bond Index, which provides a market-value-weighted portfolio of investment-grade corporate bonds with one to five years remaining to maturity. Eligible bonds must be denominated in U.S. dollars and have at least $300 million in outstanding face value. The index filters out certain types of bonds such as floating-rate bonds, contingent capital securities, Eurobonds without SEC registration, and bonds with equity features.
Financial services is the fund's biggest sector by a wide margin, as these firms dominate the short-term, investment-grade corporate bond market. The fund tends to invest nearly half of its assets in the financial services sector, followed by around 9% and 7% in technology and industrials, respectively.  
Many funds in this category have wider mandates that include government and securitized bonds, which the fund omits by definition. Compared to the category average, the fund consistently underweights Treasuries and agency bonds by a wide margin. This pulls its credit risk profile into more aggressive territory. The majority of its assets are invested in bonds rated BBB or A, while its peers can load up on higher-rated government bonds instead. 
The fund’s duration also runs slightly higher. It often allocates more to bonds in the three- to five-year maturity bucket than its category peers because many of them venture into ultrashort bonds instead. A longer average duration can make the fund more vulnerable to interest-rate-driven downturns. 
Nonetheless, a low fee and relatively riskier profile have helped it regularly outperform the category average so far. The fund captured much of the market’s upside when credit spreads tightened or bond yields fell, making up for its underperformance during stressful periods. The fund has outperformed the category average by 87 basis points annualized from its 2009 inception through May 2023.

Analyst Rating

A well-constructed portfolio of short-term corporate bonds.

Analyst

Lan Anh Tran

This portfolio takes on well-rewarded risks. The fund boasts a broad portfolio of short-term, investment-grade corporate bonds that look riskier than many of its category peers, but investors should be compensated accordingly. The fund earns a Process rating of Above Average.

Above Average

Process

An experienced, well-equipped team manages all of Vanguard's fixed-income index funds, underpinning an Above Average People Pillar rating.
Joshua Barrickman was named as manager in 2009. 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 ETF team, which helps with ETF basket creation. These managers are 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 Short-Term Corporate Bond ETF

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