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A Strong Choice From Vanguard for High-Yield Bond Exposure

Silver-rated Vanguard High-Yield Corporate has a knowledgeable management team, sound long-term track record, and highly attractive price tag.


Sumit Desai: High-yield bonds can play a unique role within a diversified portfolio. The asset class can provide strong income generation if investors maintain a long-term view, avoid trading in and out of the sector, and focus on capital preservation. One of the primary risks for high-yield bonds is deterioration in a company's fundamentals to the point of default, which leads to capital impairment.

For that reason, we think it makes sense for investors to focus on the higher-quality portions of the high-yield bond market.

The Vanguard High-Yield Corporate fund focuses on that higher-quality portion.

This fund is overseen by longtime manager Michael Hong, from the fund's subadvisor Wellington Management. Hong is a 20-year veteran of Wellington and is supported by a team of 15 high-yield analysts.

The team's process gives the fund it's high-quality bias. They largely avoided CCC rated bonds for most of the ongoing multiyear rally in high-yield bonds and as of April 30, the fund held just under 7% of total assets in bonds rated CCC or below, which is about half the amount of the average high-yield bond fund. The team here also did an impressive job of avoiding the carnage in the energy and commodity sectors over the past year and a half.

Aside from its great long-term track record, we also like this fund due to its bargain-basement price tag. The fund's investor share class charges only 23 basis points, which is cheaper than even most high-yield ETFs.

With over $18 billion in assets, this is the largest fund in the Morningstar High-Yield Bond Category. Size can create some challenges, but the fund's strong management team, long-term track record, and highly attractive price tag make this fund a strong option for investors seeking high-yield bond exposure.

Sumit Desai, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.