High-quality bonds look increasingly interesting to me. We just went through one of the most vicious bear markets for bonds in history, which sounds like a good time to invest on a go-forward basis in this critical asset class. And if you’re in agreement, there are tons of core bond funds out there that you can use to allocate to. One fund that caught my attention is the Vanguard Core-Plus Bond ETF (NASDAQ:VPLS). This ETF invests in a broad spectrum of debt instruments, ranging from government bonds to corporate bonds to emerging-world debt. Don’t let the “plus” side of the fund scare you – this is primarily a super high quality rated fund.
A Look At The Portfolio
The fund has numerous bond holdings – 783 as of writing. When we look at the holdings, we see that no position makes up more than 3.48% of the portfolio.
vanguard.com
Importantly, though, the largest positions are all government and AAA rated. This is why I said earlier that as a core bond fund, it’s as high quality as it gets, given that these types of positions have no default risk because they are government issued. Nearly 85% of the fund is rated A or up, with the largest share going to U.S. Government issues.
vanguard.com
Perhaps most interestingly, the fund has a decent allocation to emerging markets, which is where the “NR” rating (not rated) comes into play. This is a potential source of volatility in the fund (and therefore a source of risk) that can seem odd when we’re talking about a fixed-income product, but makes a lot of sense when thinking about pushing the upside as much as possible while being balanced against U.S. Treasuries.
On the yield side of the equation, the fund’s portfolio blends a range of yields, with some positions paying what for many investors would be a modest level of interest while others provide more income potential. This diversified level of compounded interest effectively enables VPLS to satisfy their differing income expectations, all within a total return context. The 30-Day SEC yield stands at 5.08% now.
Peer Comparison
The fund that this is worth comparing to is the Vanguard Total Bond Market ETF (BND) given that too is competing for core allocation flows. Granted VPLS has only been around since December last year, out of the gate it is outperforming on a total return basis. This could be because of some of the higher yielding securities on the emerging market positioning, so this could certainly get undone should a global crisis take place. Still – good to see.
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Pros and Cons
On the plus side? Nice overall exposure. I actually like that it has some positions outside the U.S. and that the weighted risk is not significant. Investment-grade securities are the foundation of the fund, as they should be for something that can be a core allocation to bonds in your portfolio.
The negative? The bond bear market may not be over, even though I think it is. That means this could still have a hard time going forward as inflation remains sticky and questions remain over the Fed’s next move. Hardly shocking to say that, but it’s worth emphasizing. The exposure to emerging market bonds, while I like it, does introduce other risks, including currency movement as these are unhedged to dollar volatility on a relative basis to where those bonds are issued. At the margin, that might actually be a good thing whenever the Dollar broadly has a decline, but it’s something to keep in mind as at the margin, it could result in performance that could be disappointing relative to a pure US only core bond ETF.
Conclusion
The Vanguard Core-Plus Bond ETF looks like a solid fund. It maintains high-quality diversification while having some exposure to emerging market debt, which might be considered more satellite to the core holdings. The yield is strong, and it’s a Vanguard fund. I think it’s worth considering overall.
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