Playing Defense Pays Off for Our Favorite Junk Bond Fund

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Some bond market watchers say that high-yield bonds – those rated between double-B and triple-C – aren't exactly bargains these days. Others say there's still opportunity in this part of the fixed-income market.

We checked in with Michael Chang, one of two subadvisers behind our favorite junk bond fund, the Vanguard High-Yield Corporate (VWEHX), to get the lowdown. Chang, of Vanguard's in-house bond group, runs one-third of the assets in the fund; Wellington Management's Elizabeth Shortsleeve runs the rest.

Chang concedes that "it's tough to make the case that high-yield bonds are overly attractive today." But in his view, the U.S. economy is healthy, and relative to other parts of the bond market, "high yield offers decent opportunities to generate good income in a market where income is hard to come by." The fund yields just under 6.0%.

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The Vanguard High Yield Corporate – a member of the Kiplinger 25, the best no-load mutual funds you can buy – eked past its competition over the past 12 months with an 8.0% return, in part because Chang's portion of the fund was defensively positioned heading into the spring selloff in bonds.

He had a pot of cash and a heavy tilt toward the higher-quality end of high-yield bonds – debt rated double-B and single-B – in defensive sectors such as food and beverage, health care, and utilities. That mix of bonds weathered the April selloff well, Chang says.

Hunting for bargains

Chang and his team of 15 managers, traders and analysts also boosted the fund's performance by snapping up stakes in lower-quality high-yield debt – rated single-B and triple-C – that had sold off, "in some cases dramatically," he says. "April gave us the opportunity that we had been waiting for to invest in some names we liked" but had previously been too expensive, he says, particularly in the retail sector.

Since both he and Shortsleeve became managers of the fund in August 2022, the Vanguard High Yield Corporate Fund has returned 7.9% annualized, just ahead of its high-yield fund peers.

This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Nellie joined Kiplinger in August 2011 after a seven-year stint in Hong Kong. There, she worked for the Wall Street Journal Asia, where as lifestyle editor, she launched and edited Scene Asia, an online guide to food, wine, entertainment and the arts in Asia. Prior to that, she was an editor at Weekend Journal, the Friday lifestyle section of the Wall Street Journal Asia. Kiplinger isn't Nellie's first foray into personal finance: She has also worked at SmartMoney (rising from fact-checker to senior writer), and she was a senior editor at Money.