HoldingsCorporate bonds issued by Anheuser Busch, Apple, Verizon and others
You often have to spend money to make money, whether you’re a small businesses or a giant corporation.
And if you’re a business owner, the question is this: Where do you get money in order to expand and innovate? One way is to issue bonds — or, borrow money with the promise of interest payments to the bondholder. For corporations, those interest payments can end up being quite large.
And for investors, they can prove to be a great way to park your money, earn a decent return, all with a potentially low amount of risk.
If market swings strike fear in your heart, bonds can often provide a safer, less volatile option. Corporate bonds, like those contained in the Vanguard Intermediate-Term Corp Bond (ticker: VCIT) Big Business Bonds give investors exposure to the bond market and some portfolio stability.
Corporate bonds generally pay higher yields because they’re issued by companies, not the federal government. That can make them riskier bets, and to compensate for the risk, the companies that issue them offer higher interest rates.
What’s in the Big Business Bonds fund?
The short and sweet of it: Intermediate-term corporate bonds. That means U.S. corporate bonds that mature in five to ten years.
Big Business Bonds (VCIT) tracks the Bloomberg Barclays U.S. 5-10 Year Corporate Bond Index, which “includes U.S. dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies”, according to the fund’s prospectus.
The fund contains 1,752 bonds and $20.6 billion total net assets as of February 28, 2018, according to Vanguard. Most of the bonds were issued by firms in the finance (36%) and industrial (59%) sectors, with a small percentage originating from utility companies.
Some of the individual companies included among the fund’s largest holdings are financial services company Bank of America, beverage maker Anheuser-Busch InBev, telecommunications giant Verizon, and defense contractor Halliburton.
Fund performance and other details
The fund launched in 2009, and it’s managed by Vanguard.
The fund’s return is -2.66%, as of March 20, 2018, according to Morningstar. Between 2010 and 2017, the Big Business Bonds’ annual return has ranged from -1.94% in 2013 to 10.53% in 2012.
In 2016 and 2017, the annual return was greater than 5%. The share price, at inception, was below $76. As of March 20, 2018, it’s hovering above $84, according to Morningstar.
How does VCIT stack up to similar funds? A comparable ETF is the iShares 5-10 Year Invmt Grd Corp Bd ETF (ticker: MLQD), which has a nearly identical goal of providing exposure to intermediate-term U.S. corporate bonds.
While VCIT has been around for many years, MLQD is only several months old. Since its September 12, 2017 launch, it’s followed roughly the same performance trajectory as VCIT. Year-to-date, the fund is down 1.93%, according to Morningstar.
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Risks and considerations
VCIT is a bond fund, making it potentially less risky than stock funds. However, that doesn’t mean it isn’t subject to volatility. Since 99% of the fund’s assets are bonds, that means it’s not diversified. Aside from being subject to inflation, which can wear away at bond yields, the bonds are also concentrated in a few key industries.
If you’re particularly risk-averse, you should be aware that funds like VCIT are associated with a moderate level of credit and interest rate risk, according to the fund’s prospectus. Again, this differs from treasuries, which are obligated to pay, further reducing risk.
Credit risk refers to the chance that a bond issuer will default; Interest rate risk refers to the chance that varying interest rates can affect the share price of bonds, and therefore the funds that hold them.
The fund does have relatively low costs, with an expense ratio of 0.07%, 91% lower than the average for similar funds, according to Vanguard.
- Big Business Bonds gives investors exposure to the corporate bond market
- Investing in a bond-focused ETF can diversify your portfolio
- Corporate bonds aren’t as safe as government bonds, but offer higher yields