Wed, 21 Oct 2015
Adding more investment-grade bond exposure to the total bond index might be a good way to boost returns without too much additional credit risk, says Vanguard found Jack Bogle.
Christine Benz: I'd like to get your thoughts on fixed-income instruments. In the past, you've argued--and you've just argued today--that investors could reasonably consider tilting their bond portfolios a little bit more toward corporate bonds than is the case with the Barclays U.S. Aggregate Bond Index.
Jack Bogle: Well, it will be diversified in a different way, but it will be a slightly longer maturity and it will be slightly lower quality. For the average corporate-bond fund, AAA has just about vanished, as you know. The average is maybe somewhere between AA and A plus for the average corporate bond. And that's not AAA. So, is credit risk possible there? Of course. You're quite right. So, you're taking a little more risk. But I often use our intermediate-term bond index, which is about 45% governments, I think, rather than 70%. And I often use some investment-grade corporate fund, which is very much like an index fund and has an R-squared of something like 98 or 99 with the Aggregate Index. That's very indexlike, and you can get almost an extra 1% yield.
So, if you look at this year, I can't give you the exact numbers, but it hasn't been a great year for bonds. But if the bond market is up maybe 0.6% or 1%, these two funds are up about 2%. If you can pick up an additional percentage point of yield--and investors are starved for good yields--I think you're doing it in a sensible way. And if you don't agree, I think what people often forget about the mutual fund business is that you don't have to go all the way. Do a little. Some people think you should be in the stock market or out, or in the bond market or out--or a total bond index. You don't have to do that. You could, for example, keep the total bond market index but move one third of it into an intermediate-term corporate-bond index fund. I think that's a little more work. And at some point, I think we all ought to be rethinking what a bond index is really about.