VCIT - VCIT: A Potential Beneficiary In A Flight To Quality

2023-08-28 10:55:58 ET

Summary

• The Vanguard Intermediate-Term Corporate Bond ETF offers a sustainable level of current income through high-quality, investment-grade corporate bonds.
• VCIT has a low expense ratio of 0.04% and has delivered YTD returns of 2.09%.
• The fund's focus on intermediate-term bonds and investment-grade bonds mitigates risks such as interest rate risk and credit risk.

Quality means doing it right when no one is looking. - Henry Ford

I've been warning about a credit event likely coming in September given the lagged effects of the fastest rate hike cycle in history and think there's a very real risk that we enter a severe risk-off period shortly. If I'm right, there will be demand for high-quality assets, and ultimately high-quality debt. The Vanguard Intermediate-Term Corporate Bond ETF ( VCIT ) is an ETF that aims to provide a sustainable level of current income by investing primarily in high-quality, investment-grade corporate bonds. Its emphasis on intermediate-term bonds adds a distinct advantage by balancing the risk-return tradeoff, which is why I like this as a portfolio allocation now.

VCIT Overview

VCIT is managed by Vanguard, one of the world's leading equity and fixed-income managers. The fund seeks to track the performance of a market-weighted corporate bond index with an intermediate-term dollar-weighted average maturity. Investment in this fund could lose money over short or potentially longer periods due to market fluctuations. However, it's noteworthy that the fund's exposure to beaten-down bonds makes it attractive from a "buy low" standpoint, given higher overall yield than just a couple of years back.

Performance and Fees

VCIT has an expense ratio of 0.04%. It has delivered Year-To-Date (YTD) returns of 2.09% (as of 08/25/2023). The fund's historical volatility measures show a correlation of 1.00 with the Bloomberg U.S. 5-10 Year Corporate Bond Index and 0.97 with the Bloomberg U.S. Aggregate Bond Index.

VCIT Portfolio Composition

The VCIT holds 2090 bonds with a yield to maturity of 5.4%. The average coupon rate stands at 3.9%, with an average effective maturity of 7.5 years and an average duration of 6.2 years. The fund's total net assets as of 07/31/2023 amount to $41.5 billion.

The fund is made up of single A and triple B quality bonds. This makes it slightly riskier than an AAA bond fund and less risky than junk debt.

Risks & Rewards

VCIT is subject to various risks, including interest rate risk, income risk, credit risk, and index sampling risk. However, these are balanced by potential rewards. The fund's focus on intermediate-term bonds means its prices are less sensitive to interest rate changes compared to long-term bonds, mitigating interest rate risk. Furthermore, the fund only invests in investment-grade bonds, reducing credit risk.

Peer Comparison

In comparison to similar ETFs, VCIT stands out with its low expense ratio of 0.04%, significantly below the industry average of 0.25%. This makes VCIT a cost-effective choice for investors seeking exposure to intermediate-term corporate bonds.

Distribution and Tax Implications

VCIT offers monthly distributions. However, these distributions can have tax implications, especially for investors holding the fund in a taxable account. It's essential for potential investors to understand these implications before investing.

Conclusion

The Vanguard Intermediate-Term Corporate Bond ETF presents a compelling investment opportunity for those seeking moderate and sustainable income. Its focus on intermediate-term and high-quality corporate bonds provides a balance of risk and returns. Would this fund get hurt if I'm right about a credit event? Yes - but it shouldn't be anywhere near as vulnerable as other lower-rated bonds and the broader stock market.

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