Mutual Fund Spotlight: Vanguard Long-Term Corporate Bond [VCLT]
By: Ted Black, CFP©
Summer 2024 (Vol. 42, No. 2)
Since we’ve only covered one Exchange Traded Fund in the past, the T. Rowe Price Capital Appreciation Equity ETF (TCAF) in July of 2023, lets first do a quick review of what an Exchange Traded Fund (ETF) is. Mutual funds and exchange-traded funds (ETFs) have much in common. Both mutual funds and ETFs are offered in many different varieties (stock funds, bond funds, sector funds, actively managed, indexed, etc.) and are popular, low-cost vehicles investors can use to diversify their investment holdings.
While mutual funds and ETFs are similar in many respects, there are some differences between the two. Perhaps the most notable difference between the two is that ETFs can be traded intra-day like stocks, while mutual funds can only be purchased at the end of each trading day based on a calculated price known as the net asset value (NAV).
Since ETFs trade intraday like stocks, years ago one obstacle to purchasing an ETF vs. a no-load mutual fund was the commission charged by the brokerage firm. However, in recent years almost all of the major brokerage firms serving individual investors (Charles Schwab, E-Trade, Fidelity, etc.) have moved to $0 commissions for most stock and ETF transactions. This has opened up the ever-growing number of ETFs to those investors reluctant to pay commissions and transaction fees.
The Vanguard Long-Term Corporate Bond ETF (VCLT) invests primarily in U.S. dollar-denominated investment-grade fixed income securities issued by industrial, utility, and financial companies with maturities greater than 10 years. In the bond market, there’s an important measurement called “duration”. Duration is a measure of the sensitivity of the price of a bond to a change in interest rates. Generally speaking, the higher the duration, the more a bond’s price will increase if interest rates fall, or decrease if interest rates rise. And longer-term bonds generally have a higher duration than shorter-term bonds.
The Federal Reserve Board’s (The Fed) ongoing fight to tame inflation appears to be making headway. Although still above the Fed’s target, inflation has declined significantly since peaking and appears to be on a sustainable path lower. This unfolding development has led market participants to speculate that the Fed may begin lowering rates as early as September.
Based on the composition of its holdings, VCLT has a high duration, meaning that it’s quite sensitive to changes in interest rates. As such, the past several years of steadily higher rates has been rough sledding for the fund. However, if in fact rates have peaked and the next move is down, between its attractive current yield of 4.92% and the potential for price appreciation, this fund may be a viable addition to the bond portion of one’s portfolio.
Performance annualized and updated through 06/30/2024:
1-Year: +2.12%; 3-Year: -6.92%; 5-Year: -0.84%
The gross annual expense ratio is 0.04%
If you’re interested in this fund, or would like a portfolio review to determine if this fund might be an appropriate addition to your portfolio, please call Ted Black, CFP© at 888-878-0001, extension 3.
Statistics and information provided by Morningstar and Vanguard. Please visit the Vanguard website at https://investor.vanguard.com/ investment-products/etfs/profile/vclt for the most recent performance information. The principal value and investment return will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Returns shown, unless otherwise indicated, are total returns, including any capital gains or losses and all dividend and capital gains distributions. The performance data quoted represents past performance and in no way guarantees future results. Mutual funds and ETFs are not FDIC insured.
Mutual funds and ETFs are sold by prospectus. An investor should consider the investment objectives, risks, charges and expenses of the investment company carefully before investing. The prospectus contains this and other information about the investment company. Please contact our office at 888-878-0001 to obtain a prospectus. Please read the prospectus carefully before you invest or send money.
Advisory services offered through Royal Palm Investment Advisors, Inc., a Registered Investment Advisor.