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By Kent Thune
| January 19, 2017
Vanguard funds are some of the best mutual funds in the universe for buy-and-hold investing. But now can be a good time for tactical investors to start selling shares of certain types of funds.
With an aging bull market that is much closer to the end than the beginning — and rising interest rates marking the mature phase of the business cycle — we can identify some specific areas of the market that investors will want to avoid … or at least minimize exposure.
So Bogleheads and other investors preferring the low-cost, long-term attributes of Vanguard funds can hold onto their core holdings, such as Vanguard 500 Index Fund Investor Class (VFINX), and some of the best Vanguard funds for 2017, but sell shares of a few funds that look to underperform for the foreseeable future.
With that backdrop, here are three Vanguard funds to sell now.
Expenses: 0.16%, or $16 annually per $10,000 invested
Minimum initial investment: $3,000
A secular bear market for bonds is upon us and passive funds like Vanguard Long-Term Bond Index Fund Investor Shares are not the best ideas to hold now.
VBLTX has two primary problems facing it now:
1) Index bond funds can be risky in rising-rate environments and 2) Long-term bonds are more interest-rate sensitive than bonds with shorter maturities.
Active fund managers have the discretion to buy the best types of bonds for rising interest rates, which by the way are not long-term bonds. Generally, bond prices fall as interest rates rise, and the longer the maturity the more the prices fall.
The only way long-term bond funds like VBLTX can do well in 2017 and beyond is for the rise in rates to go at a slower pace than the market is predicting, or for rates to retrace back down. Neither scenario appears likely now.
Mutual funds that hold interest-rate sensitive stocks, such as real estate investment trusts, will likely fall behind the broad market indices in the short run. This makes Vanguard REIT Index Fund Investor Shares a likely underperformer to sell now.
Like bonds, prices for REITs have historically had an inverse relationship with interest rates: When rates are low or falling, REITs generally perform best; when rates are rising, REITs typically underperform.
The VGSIX portfolio holds REITs like Simon Property Group Inc. (SPG), Public Storage (PSA) and Prologis Inc. (PLD). While these stocks can see price growth in a growing economy, their challenges against rising rates make funds like VGSIX prospects for selling.
The mature phase of a business cycle is a good time to steer clear of the riskier stocks in the market, and this makes Vanguard Explorer Fund Investor Class among the group of Vanguard funds to avoid now.
The VEXPX portfolio focuses on small U.S. companies with growth potential, such as its top holdings Cadence Design Systems Inc. (CDNS), Abiomed, Inc. (ABMD) and Cardtronics PLC (CATM). The business cycle is in its later stages, and as the bull market ages, the best gains to be had in small-cap stocks have been put in and tactical investors don’t want to be over-allocated to riskier stocks when the bear returns.
Like the other Vanguard funds on our picks to sell now, VEXPX is an outstanding long-term holding. But if minimizing risk is your goal, now is the time to back away.
This article is by Kent Thune of InvestorPlace. As of this writing, he did not hold any of the aforementioned securities.
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