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A Cautious High-Yield Bond Fund

Tue, 13 Jun 2017

Silver-rated Vanguard High Yield Corporate focuses on the higher quality tiers of the junk-bond market.

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Video Transcript

Sarah Bush: Like its competitors in the high-yield category, Vanguard High Yield Corporate invests in the debt of highly leveraged companies that have below investment grade--or junk--credit ratings. But this fund takes a somewhat more cautious approach than many of its peers. It traffics more lightly than most in the riskiest high-yield bonds. Instead it focuses on BB and B tiers of the market, which tend to have lower default rates. As a result, this fund doesn't always keep up with its peers when high yield rallies, but it typically holds up better than most when defaults spike and lower quality bonds suffer losses.

That was true in 2015 and into early 2016 when the fund held up much better than its average competitor amid losses for high-yield funds. A focus on less risky tiers of the junk-bond market helped as did the team's significant underweighting to energy bonds; these bonds were hard hit as oil prices plunged. Although the fund lagged some as junk bonds came roaring back in later 2016, its long-term record is solid.

This fund has other strengths as well, which start with an experienced and well-resourced investment team at Wellington Management Company that's led by Michael Hong. Also, like many Vanguard funds, it also has rock-bottom fees. Its investor share class charges just 23 basis points. That's cheap relative even to institutional share classes and means that this fund can generate a competitive yield and solid total returns without taking on as much risk as many in its category.

Vanguard High Yield Corporate earns a Morningstar Analyst Rating of Silver and is a strong choice for investors in search of junk bond exposure.

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