We have qualitatively reviewed this strategy and reaffirmed its Above Average Process and People ratings. The following text is from Oct. 6, 2022.

Vanguard Total Corporate Bond ETF VTC offers a representative exposure to investment-grade corporate bonds with its well-constructed portfolio and attractive price tag.

The fund tracks the Bloomberg U.S. Corporate Bond Index, which captures U.S.-dollar-denominated corporate bonds with an investment-grade credit rating. Eligible bonds must also have a fixed coupon rate and at least USD 300 million in par amount outstanding. The index excludes municipal bonds, bonds with equity features such as warrants or preferreds, and contingent capital securities with explicit balance-sheet-based triggers. Selected bonds are weighted by their market value.

The fund’s wide scope and sensible weighting approach has resulted in a portfolio with similar sector allocation as the Morningstar Category average. The fund tends to park around 30% of its assets in bonds issued by financials firms, which reflect the issuance activities in the investment-grade credit space. Its duration is only slightly higher than that of the category average. As of August 2022, the fund’s average effective duration stood at 7.5 years compared with the category average’s 7.2 years.

Overweighting A-rated bonds is the only notable difference between this fund and its average peer. It tends to park around 40% of its portfolio in these bonds, versus 25-30% for the category average. Consequently, the fund’s credit risk profile can look more conservative than its category peers. That has helped it provide better downside protection during major credit shocks, such as the coronavirus-driven shock of 2020 or the 2008 global financial crisis. However, it can also cause it to underperform when investors reach for yield in riskier bonds. 

Nonetheless, around half of the fund’s assets still tend to be invested in BBB rated bonds, similar to the category average. This will be the main driver of the fund’s credit profile, which should keep its pre-fee performance in line with category peers.

Analyst Rating

Affordable access to investment-grade corporate bonds.

Analyst

Lan Anh Tran

Vanguard Short-Term Corporate Bond ETF

Vanguard Long-Term Corporate Bond ETF

Vanguard Intermediate-Term Corporate Bond ETF

We have qualitatively reviewed this strategy and reaffirmed its Above Average Process rating. The following text is from Oct. 4, 2022. 

VTC provides broad exposure to investment-grade corporate bonds through a market-value-weighted portfolio. The fund’s sensible approach earns it a Process rating of Above Average.

The fund holds individual ETFs that track different subsets of the benchmark by maturity range. This approach helps reduce transaction costs compared to holding individual bonds, particularly with a smaller asset base. The premium/discount on the underlying ETFs can also affect the fund’s short-term tracking error, but its long-term performance should remain close to its target index.

Above Average

Process

We have qualitatively reviewed this strategy and reaffirmed its Above Average People rating. The following text is from Oct. 4, 2022. 

An experienced, well-equipped team manages all of Vanguard's fixed-income index funds, underpinning an Above Average People Pillar rating.

Joshua Barrickman is the named manager for this fund. 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 that helps construct ETF creation and redemption baskets. Barrickman is also supported by a team of traders who focus on execution and a data team that helps prepare for upcoming index changes. These teams free up time for the manager to focus on portfolio construction and index-tracking. 

A separate risk management team independently monitors managers’ performance. Vanguard aligns managers’ incentives with investors’ best interest 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 Total Corporate Bond ETF

VTC is a fund-of-funds. It tracks an index designed to provide exposure to investment-grade US corporate bonds with broad maturities.

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

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

Record issuance in bonds to start 2024 is now showing up in the sales numbers. In the case of corporate bonds, record issuance in January was met with record sales in February as the scramble to lock in yields is spurring bond buyers to act.

An ETF to Consider Amid Record Corporate Bonds Sales

Record issuance in the corporate bond market is giving fixed income investors an abundance of opportunities. However, due diligence is necessary as high-yielding bonds may uncover a risky proposition that doesn't quite match an investor's risk profile.

Avoid Risky Corporate Bonds but Attain Yield With This ETF

A record month of issuance in January and still relatively high yields could be prime drivers of demand for corporate debt in the current market environment. With that, an all-encompassing approach to corporate debt is available in the Vanguard Total Corporate Bond ETF ETF Shares (VTC).

An ETF to Consider as Demand for Corporate Debt Heats Up

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.

January to be Busiest Month for Bond Sales in 7 Years

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Wall Street is doubling down on their bond bets for 2024. The notion that rate cuts are finally coming in 2024 spurs this movement.

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ETFs are the instrument of choice for millions of investors in the U.S. Through a single trade and for a relatively low price, an investor gains broad exposure to a market, sector or niche. They don't have to go out and purchase dozens of individual securities for diversification.

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Given their overall credit risk versus safer government debt, corporate bonds may not get enough exposure in a retirement portfolio. However, they can serve a purpose as long as investors are aware of their nuances.

Corporate Bonds Can Be a Part of a Retirement Portfolio

With the markets expecting interest rates to fall, the bond market may see more upside, including corporate bonds. Those haven't gotten much attention in various parts of the globe, according to research by Fisch Asset Management.

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Thirty years ago, the exchange traded fund was launched. Now, upward of $6.5 trillion is invested in U.S. ETFs and accounted for more than 30% of exchange volume in 2022.

ETFs Still on the Rise 30 Years Later

After a rough year, investment-grade corporate debt appears to be making a comeback in 2023. Since the start of the year, investment-grade corporate bonds globally have gained more than 3.6%, according to Bloomberg Indexes, putting them on track for experiencing a record return for January.

Target VCLT and VTC While Corporate Debt Makes a Comeback

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The 60-40 stock-to-bond portfolio mix is getting a revamp courtesy of Blackrock's chief investment officer Rick Rieder. In a current market environment where interest rates are rising, and volatility is racking the stock markets, Rieder suggests flipping the script on the 60-40 portfolio by skewing it more towards bonds.

CIO Suggests Flipping 60-40 Portfolio for More Bond Exposure

The overall bond market has been feeling the downward pressure of rising interest rates, but corporate bonds might be feeling an extra pinch. Nonetheless, investors seeking yield still offer an attractive option despite the dreary environment for bonds.

Corporate Bonds Under Pressure, but Yields Still Attractive

All eyes in the capital markets continue to be on the U.S. Federal Reserve and how their interest policy strategy will play out for the rest of the year. In the meantime, short-term corporate bonds are an attractive option to mitigate rate risk in the near term and get yield over the long term.

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Corporate bonds and real estate investment trusts (REITs) are two ways fixed income investors can obtain more yield in order to try to outpace inflation as the Federal Reserve looks towards more rate hikes. “Although there are a number of differences between REITs and bonds, there are also some similarities,” Yahoo!

2 ETF Options for REIT or Corporate Bond Exposure

A hawkish Federal Reserve is forcing companies to issue more bonds ahead of rising interest rates in the current inflationary environment. As such, a deluge of corporate bonds is expected to hit the debt market.

Companies Scramble to Issue More Bonds Ahead of More Rate Hikes

For the first half of 2022, stocks and bonds were seeing eye to eye amid inflation fears as sell-off pressures pushed both assets downward. With the second quarter well underway, bonds are starting to look like the more attractive option as recession fears mount, according to one market strategist per a Markets Insider article.

Strategist: Bonds Are More Attractive Than Stocks

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As the energy sector continues to trounce other sectors in 2022, a portfolio of corporate bonds with reduced energy sector exposure seems less than ideal. However, year-to-date, investors have bucked the trend to put net millions into ESG bond ETFs.

Millions Are Still Flowing Into ESG Bond ETFs

At some point, the bond market was going to rally again after seeing prices depress as yields shot higher. Whether or not the rally stays is anyone's guess, but investors are betting on more strength ahead, diving back into government bonds.

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Signs of life are appearing in the corporate bond markets, which have followed stocks downward amid inflation fears. Corporate bonds churned out a positive month, giving potential investors reasons to dive back into riskier assets again.

Corporate Bond Investment Is Picking Up Again

Weaker economic data could be pushing investors back into the safe confines of the bond markets again. As such, benchmark Treasury yields are pushing higher amid the stock market volatility, potentially signaling a bond market comeback.

Bond Prices Are Starting to Push Higher Amid Stock Market Volatility

Bond investors may be seeing less red with summer around the corner if Rick Rieder, chief investment officer of global fixed income at BlackRock, is correct. Rieder sees the recent sell-offs subsiding as summer wears on and the U.S. Federal Reserve unwinds its $9 trillion balance sheet.

Bond Sell-Off Should Wind Down During the Summer, Analyst Says

Inflation fears continue to spur an exodus from bonds, but as more selling pressure occurs, that only clears the runway for savvy investors looking for bargains. In the meantime, all eyes in the capital markets continue to focus on the Federal Reserve.

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The Bloomberg U.S. aggregate bond index has fallen 11% from its peak, marking its largest fall since the bond bull market that began 40 years ago. Given all that, however, now may be the time to add bonds to a portfolio.

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