Vanguard Short-Term Investment-Grade Keeps It Short and Sweet
This member of the Kiplinger 25 focuses on debt with one- to five-year maturities, making it less sensitive to interest-rate shifts.
Rising interest rates have squelched returns in the broad bond market—when interest rates rise, bond prices fall. But Vanguard Short-Term Investment-Grade (symbol VFSTX) focuses on debt with one- to five-year maturities, which makes it less sensitive to interest-rate shifts. That’s partly why the fund’s 4.2% return over the past 12 months beat the Bloomberg Barclays U.S. Aggregate Bond index. Short-Term Investment-Grade, a member of the Kiplinger 25, beat its bogey, the Bloomberg Barclays U.S. Government/Credit 1-5 Year index, over the past year, too.
Nimble moves by lead manager Arvind Narayanan also helped. Heading into 2020, Narayanan, who runs the fund with Daniel Shaykevich and Samuel Martinez, shed some corporate bond holdings—he viewed them as “rich,” he says—and scooped up less-risky mortgage-backed securities instead. That conservative positioning paid off in the spring of 2020 as bond prices sold off amid COVID fears. Corporate bonds suffered more than mortgage debt did, and that created opportunity. The managers then “recycled back,” as Narayanan says, into high-quality corporate debt, just as a rally in those securities began last summer.
Narayanan and his team are positioning the fund now for a strong economy and the potential for higher inflation and rising interest rates. The fund still holds corporate debt, but now that bet is more focused on low-quality investment-grade debt (rated triple-B) and high-quality high-yield debt (rated double-B). They also like consumer-oriented asset-backed securities, such as auto loans. To compensate for the extra risk, the fund holds more cash and short-term Treasuries—12% of the fund’s assets—than usual. It also means the managers can be “opportunistic” if the option arises, he adds.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Narayanan is still relatively new to the fund, but he has 20 years of experience in the bond market. And he’s got his eye on the ball. “The fund’s use case … is to provide a reliable source of income with some price appreciation and to help protect investors from large drawdowns,” he says. Since he joined in late 2019, the fund has gained 3.8% annualized, which beats its peers (short-term bond funds). The fund yields 0.85%.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
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.
-
Stock Market Today: Dow Climbs 288 Points After Amazon, Intel Earnings
Post-earnings strength from Amazon and Intel helped cushion the blow of a disappointing October jobs report.
By David Dittman Published
-
Nvidia Stock Is Joining the Dow. Is It Time to Buy?
Nvidia will replace Intel in the Dow Jones Industrial Average this Friday. What does it mean for the stock?
By Dan Burrows Published
-
Five Ways to Shop for a Low Mortgage Rate
Becoming a Homeowner Mortgage rates are high this year, but you can still find an affordable loan with these tips.
By Daniel Bortz Last updated
-
Dividends Are in a Rut
Dividends may be going through a rough patch, but income investors should exercise patience.
By Jeffrey R. Kosnett Published
-
Bond Ratings and What They Mean
investing Bond ratings assess the creditworthiness of your bond issuer, can help limit your risk of default and maximize yield.
By Donna LeValley Last updated
-
Bond Basics: Treasuries
investing Understand the different types of U.S. treasuries and how they work.
By Donna LeValley Published
-
Bond Basics: Ownership
investing Bonds come in a variety of forms, but they all share these basic traits.
By Donna LeValley Published
-
Bond Basics: Pick Your Type
investing Bonds offer a variety of ways to grow wealth and fortify your portfolio. Learn about the types of bonds and how they work.
By Donna LeValley Published
-
Municipal Bonds Stand Firm
If you have the cash to invest, municipal bonds are a worthy alternative to CDs or Treasuries – even as they stare down credit-market Armageddon.
By Jeffrey R. Kosnett Published
-
The Kiplinger 25: Our Favorite No-Load Mutual Funds
The Kiplinger 25 The Kiplinger 25 is a list of our top no-load mutual funds that have proven capable of weathering any storm.
By Nellie S. Huang Last updated