Alternative to Vanguard High-Yield Corporate fund?

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Alternative to Vanguard High-Yield Corporate fund?

Postby Solstice » Sun Aug 26, 2012 4:06 pm

Can anyone recommend a good alternative to Vanguard's High Yield Corporate fund (which is now closed)? Something with low fees.

Thanks
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby mamster » Sun Aug 26, 2012 4:32 pm

Sure: a mix of 20% Vanguard Total Stock Market and 80% Total Bond Market.
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby Electron » Sun Aug 26, 2012 4:49 pm

Take a look at Fidelity Funds SPHIX and FAGIX.

Both funds have outperformed Vanguard High Yield over multiple time periods despite higher expenses.
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby Timcom99 » Sun Aug 26, 2012 8:02 pm

Solstice wrote:Can anyone recommend a good alternative to Vanguard's High Yield Corporate fund (which is now closed)? Something with low fees.

Thanks


If you want to stay in the Vanguard family and you are looking into High yields how about Vanguard Long Term Investment Grade (VWESX)? It's yield is below the High Yield corporate fund but it has actually done better during the last 10 years by just a hair. The bonds Long Term Investment holds are of better credit rating than High Yield Corporate so there are likely to be less defaults. On the other hand the bonds are all Long bonds and are more subject to interest rate fluctuations. The expense ratio's are similiar and Vanguard gives both funds a 3 on their risk potential scale.

I realize it is apples and oranges but for pure yield in the Vanguard family this (Long Term Investment Grade VWESX) is a good alternative to the closed High Yield Corporate VWEHX. Below if the link works out it a comparison of the two funds from the Vanguard site.

https://personal.vanguard.com/us/funds/ ... tingFrom=1
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby Johm221122 » Mon Aug 27, 2012 4:10 am

Why do you want high yield?
Part of you AA and you will stay the course?good
Chasing yield?not good
Try Boglehead philosophy
" This is perhaps the most challenging part of Boglehead investing, but is essential to its success. Bogleheads adopt a reasonable investment plan and then stay the course"
http://www.bogleheads.org/wiki/Boglehea ... Philosophy
Good luck
John
Edit,take PINGO advice from your first post
Also it is frustrating, you were given such good advice on first post, you should look into why you feel you should change it.People posting here are leading you on right path.What did you feel is wrong with advice? Why change from recommended advice?
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby BornInCA » Mon Aug 27, 2012 12:02 pm

How about Wells Fargo Advantage High Yield (STHYX), Wells Fargo Advantage Short Term High Yield (STHBX), TIAA-CREF High-Yield (TIYRX), and USAA High Income (USHYX)

Those embedded links are through Vanguard's NTF site. Wells Fargo has load funds so be careful with those. I can't find cheaper or better open-end High Yield bond funds than those. Risk-Reward profile for STHBX is lower than others because of lower duration. However, in 2008, it lost 5.82%. http://quote.morningstar.com/fund/f.aspx?t=STHBX and http://www.wellsfargoadvantagefunds.com ... undNo=3242 have more detailed information but basically one cannot expect STHBX to return as much as other high-yield bond funds on the upside but it's fair to expect it to lose "less" than other high-yield bonds on the downside.
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby Solstice » Mon Aug 27, 2012 6:53 pm

Thanks very much for the replies. I was hoping to find a corporate high-yield fund with an expense ratio closer to Vanguard's -- or at least under .5%. I checked into the funds suggested here, but didn't find one with an expense ratio that low. I'm looking for an intermediate term corp. high yield bond fund, so the Vanguard long-term investment grade wouldn't work, unfortunately. We already have a broad based intermediate term bond index fund based on the Barclay's aggregate, as well as TIPs. We were looking to add a small amount of corporate high yield because it's an asset class we don't currently have and might help diversify and boost the yield a bit on the bond part of our portfolio. It's not essential, just something we'd like to add if we can find it at a reasonable cost.

Bob Brinker is recommending Metro West High corporate high-yield fund (MWTRX) in place of Vanguard's, but the expense ratio on that fund is .63%.

Does anyone know how long it usually takes for the funds that Vanguard has closed to re-open? Another option is to just wait until it re-opens -- unless it usually takes a long time for that to happen.
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby William4u » Mon Aug 27, 2012 7:12 pm

Ok, so I do not know that much about corporate bonds, and I do not own any, so take this with a grain of salt...

Isn't Intermediate-Term Investment-Grade Fund (VFIDX) close to what you want? It has an ER of 0.10%, and it invests in intermediate term corporate bonds. Wouldn't VFIDX be the closest thing to what you want: an intermediate term corporate bond fund?

https://advisors.vanguard.com/VGApp/iip ... undId=0571
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby William4u » Mon Aug 27, 2012 9:39 pm

Let me put this another way because I've often wondered it:

What is the difference between the Vanguard High-Yield Corporate fund and the Vanguard Intermediate-Term Investment-Grade Fund (VFIDX)? Where is the overlap between the funds?

I've read over the prospectuses, but I can't see where the similarities begin and end.
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby grabiner » Mon Aug 27, 2012 9:48 pm

William4u wrote:Let me put this another way because I've often wondered it:

What is the difference between the Vanguard High-Yield Corporate fund and the Vanguard Intermediate-Term Investment-Grade Fund (VFIDX)? Where is the overlap between the funds?


There is almost no overlap (except for the incidental overlap because both funds have Treasury bonds for liquidity); the two funds have bonds of different types.

High-Yield Corporate holds bonds of all maturities, but not many bonds beyond 10 years. It holds only 8% in bonds rated BBB or higher (investment-grade); most of its bonds are rated BB or B. Thus it is sensitive to credit risk; some of those bonds will default, and more will default in an economic downturn.

Intermediate-Term Investment-Grade holds mostly intermediate-term bonds with a few short-term bonds. It holds 97% in bonds rated BBB or higher, 79% A or higher. It thus has much less credit risk, but a bit more interest-rate risk, both because of longer maturities and because investment-grade bonds of a given maturity have a slightly longer duration than high-yield bonds of the same maturity.
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby abuss368 » Mon Aug 27, 2012 9:57 pm

Solstice wrote:Can anyone recommend a good alternative to Vanguard's High Yield Corporate fund (which is now closed)? Something with low fees.

Thanks


Hi Solstice,

That is simple:

1) Total Bond Market - tax advantaged
2) Intermediate Term Tax Exempt - taxable

Keep investing simple.

Best.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + REITs
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby Electron » Mon Aug 27, 2012 11:40 pm

Solstice wrote:We were looking to add a small amount of corporate high yield because it's an asset class we don't currently have and might help diversify and boost the yield a bit on the bond part of our portfolio. It's not essential, just something we'd like to add if we can find it at a reasonable cost.

There may be a few High Yield Bond ETFs to consider. HYG and JNK are often mentioned.

You might take a look at HYS which is a shorter term High Yield Bond ETF from PIMCO. The yield is still relatively high.

http://www.pimcoetfs.com/Pages/default.aspx

http://www.pimcoetfs.com/Funds/Pages/HY ... v_fundtype
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby Johm221122 » Tue Aug 28, 2012 2:45 am

Solstice wrote:Thanks very much for the replies. I was hoping to find a corporate high-yield fund with an expense ratio closer to Vanguard's -- or at least under .5%. I checked into the funds suggested here, but didn't find one with an expense ratio that low. I'm looking for an intermediate term corp. high yield bond fund, so the Vanguard long-term investment grade wouldn't work, unfortunately. We already have a broad based intermediate term bond index fund based on the Barclay's aggregate, as well as TIPs. We were looking to add a small amount of corporate high yield because it's an asset class we don't currently have and might help diversify and boost the yield a bit on the bond part of our portfolio. It's not essential, just something we'd like to add if we can find it at a reasonable cost.

Bob Brinker is recommending Metro West High corporate high-yield fund (MWTRX) in place of Vanguard's, but the expense ratio on that fund is .63%.

Does anyone know how long it usually takes for the funds that Vanguard has closed to re-open? Another option is to just wait until it re-opens -- unless it usually takes a long time for that to happen.

From your prior post, you advisor recommended (I'm not sure if you do or do not have)
Tap/large,small,international ,bond market, g fund
Roth, total stock, mid cap,tips reit,emerging market, permanent portfolio
That is 12 funds and you want to add more,IMO you are making things to complex
Tsp, large, small, (one bond)fund
Roth,total international, total bond
5 funds

" A simple portfolio has many advantages. It almost always lowers costs (including taxes), makes analysis easier, simplifies rebalancing, simplifies tax-preparation, reduces paper-work and record-keeping, and enables caregivers and heirs to easily take-over the portfolio when necessary. Best of all, a simple portfolio allows you to spend more time with family and friends, and less time managing your finances."
FROM BOGLEHEAD PHILOSOPHY
http://www.bogleheads.org/wiki/Boglehea ... Philosophy
Good luck
john
Here is another quote from boglehead philosophy
" There is a large amount of research showing that typical mutual fund investors actually perform far worse than the mutual funds they invest in because they tend to buy after a fund has done well and tend to sell what they own when it has done poorly. This behavior of buy high, sell low is guaranteed to produce poor results. Instead, Bogleheads create a good plan and then stick with it, which consistently produces good outcomes over the long term"
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby The Wizard » Tue Aug 28, 2012 8:04 am

William4u wrote:Let me put this another way because I've often wondered it:

What is the difference between the Vanguard High-Yield Corporate fund and the Vanguard Intermediate-Term Investment-Grade Fund (VFIDX)? Where is the overlap between the funds?

I've read over the prospectuses, but I can't see where the similarities begin and end.

The High-Yield (closed) fund is junk bonds, from companies with lower credit ratings.
The Investment-Grade fund is from companies with HIGHER credit ratings.
Junk bond funds pay well when times are good for those companies, but when times are bad, there are more likely to be scattered defaults in a junk bond portfolio. Junk bond funds tend to perform more like STOCK funds because of this.

But I'm not the expert; Larry could probably tell us more (and probably has, somewhere)...
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby Call_Me_Op » Tue Aug 28, 2012 8:17 am

KAWill70 wrote:There may be a few High Yield Bond ETFs to consider. HYG and JNK are often mentioned.


Warning - the average credit quality of many of the high-yield ETFs is very low. They were destroyed in 2008. Understand your risks prior to investing.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby Electron » Tue Aug 28, 2012 2:20 pm

Call_Me_Op wrote:Warning - the average credit quality of many of the high-yield ETFs is very low. They were destroyed in 2008. Understand your risks prior to investing.

Morningstar shows both HYG and JNK having an average credit quality of B. However, your point is well taken, and one also needs to evaluate active management versus indexing in this area of the bond market. Most ETFs follow an index which could be a concern in this case. I'd like to understand how the index deals with company downgrades and various other factors.

One might also argue that an actively managed fund with higher expenses can be justified if the fund group has top notch analysts and research.

In 2008, the drop in VWEHX and HYG was comparable.

http://finance.yahoo.com/q/bc?t=5y&s=VW ... X%2C+&ql=1

The chart shows NAV only. Note also that an ETF can trade above or below NAV depending on the investing climate.

One might also evaluate closed end funds. The site below has a Fund Screener that is quite useful.

http://www.cefconnect.com/

I located forty taxable high yield closed end funds. If one searches on high yield funds not employing leverage, the screen shows eight funds.
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby Solstice » Tue Aug 28, 2012 3:14 pm

Thanks again for the additional comments.

Johm221122, I understand your point about adding additional funds and I agree that it would be best to have a simpler portfolio. I think I was concerned about the bond portion of our portfolio not earning enough, since we would have most of it in the G fund (with a 0% real return) and the F fund, which I'm assuming has a low real return -- maybe someone here knows what the real return is on the Barclay's Agg bond Index, which is what the F fund is based on. We have a small TIPs holding, but it is my understanding that this fund also will likely have a real return of 0%. So I thought that by adding a small holding (5%) in high-yield corporate, it could help the overall return on the bond portion of the portfolio. I saw that Richard Ferri's book lists a 7% holding in a corp. high-yield fund for mid-life accumulators.

But I understand that these types of funds are more volatile and tend to drop a lot when the market goes down. Are there any other alternatives to a corp. high-yield fund that we could add to our bond mix in order to boost yield a bit? What about an international bond fund?
Last edited by Solstice on Tue Aug 28, 2012 3:54 pm, edited 1 time in total.
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby Kevin M » Tue Aug 28, 2012 3:39 pm

Although the Vanguard fund (VWEHX) has done the best over the last four years, JNK and HYG have both tracked it pretty closely; HYG has tracked it the most closely. If you chart them against Total Bond and Total Stock, the difference between HYG and VWEHX is almost negligible. JNK dropped more in late 2008, but has recovered more since. Here are the growth of $10K numbers for the last four years:

VWEHX: 14,871
JNK: 14,457
HYG: 14,247

VTI: 12,167
BND: 12,980

Clearly high yield has acted as a separate asset class over the last four years. You could not have achieved the same returns with some combination of Total Stock and Total Bond. If you really want exposure to high yield corporate, then either JNK or HYG will do the job. ER for JNK is 0.4%, ER for HYG is 0.5%.

Another high yield ETF that has not done nearly as well, but that has come close to the returns of Total Stock is PHB, for which the four-year growth of $10K is $11,940. PHB has performed very differently than the other high-yield funds. It never recovered as much from the big drop in late 2008.

If you look at the ETFs over shorter time periods, they are somewhat more volatile than VWEHX.

Kevin
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby abuss368 » Tue Aug 28, 2012 4:11 pm

Kevin M wrote:Although the Vanguard fund (VWEHX) has done the best over the last four years, JNK and HYG have both tracked it pretty closely; HYG has tracked it the most closely. If you chart them against Total Bond and Total Stock, the difference between HYG and VWEHX is almost negligible. JNK dropped more in late 2008, but has recovered more since. Here are the growth of $10K numbers for the last four years:

VWEHX: 14,871
JNK: 14,457
HYG: 14,247

VTI: 12,167
BND: 12,980

Clearly high yield has acted as a separate asset class over the last four years. You could not have achieved the same returns with some combination of Total Stock and Total Bond. If you really want exposure to high yield corporate, then either JNK or HYG will do the job. ER for JNK is 0.4%, ER for HYG is 0.5%.

Another high yield ETF that has not done nearly as well, but that has come close to the returns of Total Stock is PHB, for which the four-year growth of $10K is $11,940. PHB has performed very differently than the other high-yield funds. It never recovered as much from the big drop in late 2008.

If you look at the ETFs over shorter time periods, they are somewhat more volatile than VWEHX.

Kevin


Hi Kevin,

4 years is not that long to compare and contrast funds. What does this look like over 10, 20, or even 30 years?

David Swensen had an excellent section in his book, Unconventional Success, that showed for all the dividends paid by the High Yield fund, Treasuries had outperformed.

Now for a retiree who needs income, we are talking a different story.

Best.
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby Valuethinker » Tue Aug 28, 2012 4:35 pm

abuss368 wrote:Hi Kevin,

4 years is not that long to compare and contrast funds. What does this look like over 10, 20, or even 30 years?

David Swensen had an excellent section in his book, Unconventional Success, that showed for all the dividends paid by the High Yield fund, Treasuries had outperformed.

Now for a retiree who needs income, we are talking a different story.

Best.


No. that's a considerable myth we try to defeat here:

- in the HY fund, you will suffer declining distributions due to defaults-- look at the VG fund (a pretty high quality fund amongst Junk Bond funds, in terms of what it buys) and see the dividend decline since inception

-a preferred strategy is to hold lower risk securities and to spend capital as needed- -your Safe Withdrawal Rate can come from capital as well as income

- an even better strategy is to use SPIA annuities, selectively, to provide relatively high levels of income from capital (6-7.5% say) and security against outliving your money. Also you can choose high credit rating insurers, and benefit from state legislation protecting the first $100k of premium (in most states)
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby abuss368 » Tue Aug 28, 2012 4:40 pm

Valuethinker wrote:
No. that's a considerable myth we try to defeat here:

- in the HY fund, you will suffer declining distributions due to defaults-- look at the VG fund (a pretty high quality fund amongst Junk Bond funds, in terms of what it buys) and see the dividend decline since inception

-a preferred strategy is to hold lower risk securities and to spend capital as needed- -your Safe Withdrawal Rate can come from capital as well as income

- an even better strategy is to use SPIA annuities, selectively, to provide relatively high levels of income from capital (6-7.5% say) and security against outliving your money. Also you can choose high credit rating insurers, and benefit from state legislation protecting the first $100k of premium (in most states)



Hi Valuethinker,

It is not a "myth" for many of my clients, including friends and family.

There is more than one road.

Best.
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby Valuethinker » Tue Aug 28, 2012 4:45 pm

abuss368 wrote:
Valuethinker wrote:
No. that's a considerable myth we try to defeat here:

- in the HY fund, you will suffer declining distributions due to defaults-- look at the VG fund (a pretty high quality fund amongst Junk Bond funds, in terms of what it buys) and see the dividend decline since inception

-a preferred strategy is to hold lower risk securities and to spend capital as needed- -your Safe Withdrawal Rate can come from capital as well as income

- an even better strategy is to use SPIA annuities, selectively, to provide relatively high levels of income from capital (6-7.5% say) and security against outliving your money. Also you can choose high credit rating insurers, and benefit from state legislation protecting the first $100k of premium (in most states)



Hi Valuethinker,

It is not a "myth" for many of my clients, including friends and family.

There is more than one road.

Best.


Then you could be giving them inappropriate or bad advice.
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby abuss368 » Tue Aug 28, 2012 4:54 pm

Valuethinker wrote:
Then you could be giving them inappropriate or bad advice.



Hi Valuethinker,

When client portfolio's are large enough, from a lifetime of savings and investing, with plenty of interest and dividends to live from, and principal is not touched, I do not consider that "inappropriate or bad advice".

Let's not argue, create multiple posts back and forth, but rather accept that there is more than one way of doing things.

Kind regards.
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby Kevin M » Tue Aug 28, 2012 4:58 pm

abuss368 wrote:4 years is not that long to compare and contrast funds. What does this look like over 10, 20, or even 30 years?

These ETFs have not been around that long, so we don't have much more data to compare:

Fund Inception Date
----- ----------------
JNK 11/28/2007
HYG 4/4/2007

Four years shows us the performance in a bad bear market and the following recovery, and gives a pretty good indication of how well these ETFs track Vanguard's high-yield corporate bond fund. The main point here is not to recommend high yield funds, but to answer the OP's question about funds that might be used as a substitute for the Vanguard High Yield fund, which is closed to new investors. There are plenty of other threads debating the merits (or lack thereof) of high yield bond funds.

The main point of comparing to VTI and BND was to show that these two ETFs have been much more highly correlated to VWEHX than to either total stock or total bond, which is clearly visible by looking at a growth chart.

That they have generated significantly higher returns than BND or VTI over the last four years is more of an "oh, by the way" thing that also shows that they have performed like a distinct asset class over this time period.

Just for kicks, looking at VWEHX for the maximum available time period on Morningstar (since 12/31/1978), and comparing to Barclays Agg Bond Index (Vanguard total bond not available that far back) and Vanguard 500 Index, here are growth of $10K numbers:

VWEHX: 171,568
Agg Bnd: 150,018
500 Indx: 346,860

So over a longer time period, yes, you could have achieved similar results by mixing a little US large-cap blend in with total bond or some other intermediate-term bond fund.

Kevin
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby abuss368 » Tue Aug 28, 2012 5:06 pm

Kevin M wrote:
abuss368 wrote:4 years is not that long to compare and contrast funds. What does this look like over 10, 20, or even 30 years?

These ETFs have not been around that long, so we don't have much more data to compare:

Fund Inception Date
----- ----------------
JNK 11/28/2007
HYG 4/4/2007

Four years shows us the performance in a bad bear market and the following recovery, and gives a pretty good indication of how well these ETFs track Vanguard's high-yield corporate bond fund. The main point here is not to recommend high yield funds, but to answer the OP's question about funds that might be used as a substitute for the Vanguard High Yield fund, which is closed to new investors. There are plenty of other threads debating the merits (or lack thereof) of high yield bond funds.

The main point of comparing to VTI and BND was to show that these two ETFs have been much more highly correlated to VWEHX than to either total stock or total bond, which is clearly visible by looking at a growth chart.

That they have generated significantly higher returns than BND or VTI over the last four years is more of an "oh, by the way" thing that also shows that they have performed like a distinct asset class over this time period.

Just for kicks, looking at VWEHX for the maximum available time period on Morningstar (since 12/31/1978), and comparing to Barclays Agg Bond Index (Vanguard total bond not available that far back) and Vanguard 500 Index, here are growth of $10K numbers:

VWEHX: 171,568
Agg Bnd: 150,018
500 Indx: 346,860

So over a longer time period, yes, you could have achieved similar results by mixing a little US large-cap blend in with total bond or some other intermediate-term bond fund.

Kevin



Hi Kevin,

That gorwth is incredible. I guess that is the "equity" component of junk bonds, that we so often discuss on this forum "kicking in".

An investor may be able to get the same results by increasing both equities and only having high quality bonds.

Best.
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby Johm221122 » Tue Aug 28, 2012 9:33 pm

Solstice wrote:Thanks again for the additional comments.

Johm221122, I understand your point about adding additional funds and I agree that it would be best to have a simpler portfolio. I think I was concerned about the bond portion of our portfolio not earning enough, since we would have most of it in the G fund (with a 0% real return) and the F fund, which I'm assuming has a low real return -- maybe someone here knows what the real return is on the Barclay's Agg bond Index, which is what the F fund is based on. We have a small TIPs holding, but it is my understanding that this fund also will likely have a real return of 0%. So I thought that by adding a small holding (5%) in high-yield corporate, it could help the overall return on the bond portion of the portfolio. I saw that Richard Ferri's book lists a 7% holding in a corp. high-yield fund for mid-life accumulators.

But I understand that these types of funds are more volatile and tend to drop a lot when the market goes down. Are there any other alternatives to a corp. high-yield fund that we could add to our bond mix in order to boost yield a bit? What about an international bond fund?

If you can stay course and you really want too add high yield I would be willing to pay a little more than vanguard (because it's closed)
I believe a couple of high yield funds have closed(to me that's a sign not to add ,but stay the course)
I like the idea of adding more equity than stock (you can always sell stock and buy vanguard high yield when it opens)
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby grabiner » Tue Aug 28, 2012 9:52 pm

Solstice wrote:I think I was concerned about the bond portion of our portfolio not earning enough, since we would have most of it in the G fund (with a 0% real return) and the F fund, which I'm assuming has a low real return -- maybe someone here knows what the real return is on the Barclay's Agg bond Index, which is what the F fund is based on.


You shouldn't be concerned about what one part of your portfolio earns; if your portfolio as a whole earns 6%, it doesn't matter much how much was earned by the bonds and how much by the stocks.

And since the G fund has no risk, you need less of the G fund than of any other bond fund to get the same risk reduction in a stock-heavy portfolio. Conversely, if you use a high-yield bond fund, you will need more bonds to get the same risk reduction, and the reduced stock allocation will decrease your overall return.
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby Electron » Tue Aug 28, 2012 11:30 pm

Solstice wrote: Are there any other alternatives to a corp. high-yield fund that we could add to our bond mix in order to boost yield a bit?

Take a look at Convertible Bond Funds such as VCVSX. Convertibles generally represent lower grade securities and often track the High Yield Bond category.

Here is one thing to consider relative to the closing of Vanguard High Yield. Fund closings typically occur when a fund or sector has been a bit too popular. The performance since early 2009 has been spectacular and will likely not be repeated. The desire for yield in a low yield environment has affected most higher yielding stocks and bonds.

However, High Yield can be a desirable bond holding when rates rise as it often outperforms other bond categories. The large coupon lowers duration, and a strengthening economy helps the credit ratings of the bonds in the portfolio.

Lastly, if you looked at the link I posted earlier comparing VWEHX to HYG, you may have noticed that I included Fidelity SPHIX.

http://finance.yahoo.com/q/bc?t=5y&s=VW ... X%2C+&ql=1

Note that the higher expenses in SPHIX would have been worth paying.
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby Electron » Thu Aug 30, 2012 2:23 pm

Valuethinker wrote:In the HY fund, you will suffer declining distributions due to defaults -- look at the VG fund (a pretty high quality fund amongst Junk Bond funds, in terms of what it buys) and see the dividend decline since inception.

That is a very interesting point and here is a chart to illustrate the point. Dividend payments are based on the number of days in each month, and you will note the effect that each February has in the chart.

http://i1118.photobucket.com/albums/k61 ... vidend.gif

The dividends paid by just about all bond funds have declined in recent years, but the magnitude of the decline is much higher among high yield bond funds. My guess is that declining NAV is a major factor rather than defaults. The declining NAV probably includes a number of factors including buying bonds at a premium, bond rating downgrades, and trading costs.

Solstice - In response to your original post, the Morningstar Basic Fund Screener is an excellent tool for locating funds meeting any criteria.

http://screen.morningstar.com/FundSelector.html

Select the High Yield Bond category and check other criteria as desired.

If the screen includes no-load funds, an expense ratio of 0.50% or less, and a Morningstar rating of 5, three funds are shown. A Morningstar rating of 4 or 5 will bring up ten funds. Increasing expenses to 1.00% and a rating of 5 only will bring up nineteen funds.

The Morningstar Fund Investor which is available in some libraries often cites the excellent bond research at Fidelity Investments. Their comments have applied to both taxable and tax exempt bond funds.

Note also that trading costs are probably quite significant in the high yield bond category as a result of high bid-ask spread. It may pay to keep fund turnover as low as possible. Trading costs are not included in expense ratio.
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby Johm221122 » Thu Aug 30, 2012 7:23 pm

Solstice wrote:Can anyone recommend a good alternative to Vanguard's High Yield Corporate fund (which is now closed)? Something with low fees.

Thanks

Hope you caught this in other post
https://advisors.vanguard.com/VGApp/iip ... ?sf52774=1

Here is vanguard outlook
" We are less optimistic about high-yield strategies, which will show volatility similar to stocks if we are facing a recession or a breakup of the euro. I know these products are popular with advisors so I would caution them to consider investing in mutual funds instead of ETFs for this sector. The reason is the liquidity of the underlying bonds. When high-yield bonds are doing well and cash flow is positive, investors in ETFs are typically paying a significant premium over NAV in the less transparent, less liquid market for below-investment-grade bonds. When high-yield bonds are declining and cash flow reverses, investors could face not only the disappearance of that premium, but also a discount to NAV when selling the ETF. For ETF investors it’s really important in this segment of the market not to trade with the crowd because the crowd will bear the brunt of these premium-to-discount swings"
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby Jerilynn » Thu Aug 30, 2012 11:11 pm

KAWill70 wrote: A Morningstar rating of 4 or 5 will bring up ten funds. Increasing expenses to 1.00% and a rating of 5 only will bring up nineteen funds.



Statistically, the actively managed funds with a rating of 4 or 5 tend to underperform going forward. ER would be a much better metric to use.
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby Sidney » Fri Aug 31, 2012 12:05 am

Johm221122 wrote:
Solstice wrote:Can anyone recommend a good alternative to Vanguard's High Yield Corporate fund (which is now closed)? Something with low fees.

Thanks

Hope you caught this in other post
https://advisors.vanguard.com/VGApp/iip ... ?sf52774=1

Here is vanguard outlook
" We are less optimistic about high-yield strategies, which will show volatility similar to stocks if we are facing a recession or a breakup of the euro. I know these products are popular with advisors so I would caution them to consider investing in mutual funds instead of ETFs for this sector. The reason is the liquidity of the underlying bonds. When high-yield bonds are doing well and cash flow is positive, investors in ETFs are typically paying a significant premium over NAV in the less transparent, less liquid market for below-investment-grade bonds. When high-yield bonds are declining and cash flow reverses, investors could face not only the disappearance of that premium, but also a discount to NAV when selling the ETF. For ETF investors it’s really important in this segment of the market not to trade with the crowd because the crowd will bear the brunt of these premium-to-discount swings"

I saw that. I read that as a pretty clear signal - as direct as they can be given that they still offer the product.
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby Electron » Fri Aug 31, 2012 3:00 pm

Jerilynn wrote:Statistically, the actively managed funds with a rating of 4 or 5 tend to underperform going forward. ER would be a much better metric to use.

I wonder if that tendency applies more to equity funds than bond funds. Equity funds at the top of performance lists often become very large and the performance is sometimes the result of luck in security selection or tactical asset allocation. Actively managed bond funds in a given category probably vary quite a bit less among themselves than equity funds vary in any given category.

Regardless, the Morningstar Fund Screener is a useful tool. Screening on High Yield Bond Funds with expense ratio at 0.5% or less brings up a modest list of funds. A few funds looked like excellent candidates until I realized that they were institutional funds not generally available to most investors.
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby pingo » Fri Aug 31, 2012 5:55 pm

grabiner wrote:
Solstice wrote:I think I was concerned about the bond portion of our portfolio not earning enough, since we would have most of it in the G fund (with a 0% real return) and the F fund, which I'm assuming has a low real return -- maybe someone here knows what the real return is on the Barclay's Agg bond Index, which is what the F fund is based on.


You shouldn't be concerned about what one part of your portfolio earns; if your portfolio as a whole earns 6%, it doesn't matter much how much was earned by the bonds and how much by the stocks.

And since the G fund has no risk, you need less of the G fund than of any other bond fund to get the same risk reduction in a stock-heavy portfolio. Conversely, if you use a high-yield bond fund, you will need more bonds to get the same risk reduction, and the reduced stock allocation will decrease your overall return.


I whole-heartedly agree. It's about portfolio returns. In a way, forget about the funds. Truth be known, we don't really know which funds will be the sources of your returns in the future anyway. It's part of why we diversify.

I'm not against a reasonable amount of High Yield and I like Rick Ferri's suggestion (at one point) that up to 20% of your bond portion (not 20% of the whole portfolio) can be beneficial. My understanding is that it offers little, if anything, from the Swedroe point of view. Both approaches are reasonable to me and confirm that it can be beneficial, but is not essential, as one can manipulate a simpler portfolio to achieve a similar benefit (i.e. tilt the stock percent a tad higher).

Johm221122 wrote:https://advisors.vanguard.com/VGApp/iip/site/advisor/researchcommentary/research/article/IWE_InvComYieldDilemmas?sf52774=1

Here is vanguard outlook
" We are less optimistic about high-yield strategies, which will show volatility similar to stocks if we are facing a recession or a breakup of the euro. I know these products are popular with advisors so I would caution them to consider investing in mutual funds instead of ETFs for this sector. The reason is the liquidity of the underlying bonds. When high-yield bonds are doing well and cash flow is positive, investors in ETFs are typically paying a significant premium over NAV in the less transparent, less liquid market for below-investment-grade bonds. When high-yield bonds are declining and cash flow reverses, investors could face not only the disappearance of that premium, but also a discount to NAV when selling the ETF. For ETF investors it’s really important in this segment of the market not to trade with the crowd because the crowd will bear the brunt of these premium-to-discount swings"


Vanguard sees the fund as being bloated because of performance chasing or desperation for higher yield when there is little guarantee of that. It's an all too common practice to go where the returns used to be. Are you sure you want to be a part of that crowd? I know it's difficult, but the urge to reach for yield can be a portfolio killer. By closing the fund, Vanguard protected investors within and without the fund. Ultimately, that may be a protection for you, too. We could all be wrong and HY might shoot the lights out in the future, but from an investing philosophical point of view, chasing returns will burn us more often than not.

Actually, I may have been unfair. You've made it clear that you're trying to be practical and to keep it all in perspective. Perhaps you could wait until horrible performance in HY makes no one want it (just like no one wanted stocks in March of 2009). Then you could pounce on it.

Solstice wrote:Are there any other alternatives to a corp. high-yield fund that we could add to our bond mix in order to boost yield a bit?


Greater expected-reward only comes with greater expected-risk. That's why you can buy HY, or international bonds, or tilt your stock allocation a tad higher, or whatever. It is a manipulation of the only thing you can control (your purposeful exposure to risk). A stretch for higher returns can also result in lower returns because of the greater risk, right? Nothing inherently wrong with it, both we can offer no risk-free/lower risk alternatives to produce higher expected-returns.
Last edited by pingo on Sat Sep 01, 2012 2:08 am, edited 4 times in total.
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby Solstice » Fri Aug 31, 2012 6:46 pm

Thank you for all the insightful, informed comments -- they've been very helpful. I think we are going to pass on the high-yield funds right now, especially since it sounds like they are currently priced very high. I am wondering if a foreign bond fund might be worth adding (a small amount), for more diversification in the bond portfolio. I'm a little uneasy about the fact that all of our bond holdings are tied to what's happening with rates in the U.S. Are the foreign bond funds generally from developed countries? If so, how does the European debt crisis factor into their safety or desirability? I didn't see a foreign bond fund on Vanguard's site, which was surprising since they have foreign equity funds. Does anyone know why they don't offer one?
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby RyeWhiskey » Fri Aug 31, 2012 6:52 pm

Solstice wrote:Thank you for all the insightful, informed comments -- they've been very helpful. I think we are going to pass on the high-yield funds right now, especially since it sounds like they are currently priced very high. I am wondering if a foreign bond fund might be worth adding (a small amount), for more diversification in the bond portfolio. I'm a little uneasy about the fact that all of our bond holdings are tied to what's happening with rates in the U.S. Are the foreign bond funds generally from developed countries? If so, how does the European debt crisis factor into their safety or desirability? I didn't see a foreign bond fund on Vanguard's site, which was surprising since they have foreign equity funds. Does anyone know why they don't offer one?


Vanguard has a foreign bond fund in the works, though I don't know when it will be ready. Foreign bonds involve currency risk as well as all the usual bond risks, so they require a further research in my mind. Foreign bonds come in total world bond funds, developed market bond funds, and emerging market bond funds. There are also hedged and unhedged funds. I wouldn't consider adding any of these until I was fully aware of what I was getting into.
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby mikep » Fri Aug 31, 2012 6:58 pm

Lending club may work for you. Credit quality is on par with junk bonds I guess. High yield, tax inefficient.
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby Jerilynn » Fri Aug 31, 2012 7:57 pm

KAWill70 wrote:
Jerilynn wrote:Statistically, the actively managed funds with a rating of 4 or 5 tend to underperform going forward. ER would be a much better metric to use.



Equity funds at the top of performance lists often become very large and the performance is sometimes the result of luck in security selection or tactical asset allocation. Actively managed bond funds in a given category probably vary quite a bit less among themselves than equity funds vary in any given category.


Not 'sometimes' luck, it's ALWAYS luck and that's true for both actively managed bond funds and equity funds. (I just read this about an hr ago in Larry's book. )
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby Valuethinker » Sat Sep 01, 2012 3:17 am

Solstice wrote:Thank you for all the insightful, informed comments -- they've been very helpful. I think we are going to pass on the high-yield funds right now, especially since it sounds like they are currently priced very high. I am wondering if a foreign bond fund might be worth adding (a small amount), for more diversification in the bond portfolio. I'm a little uneasy about the fact that all of our bond holdings are tied to what's happening with rates in the U.S. Are the foreign bond funds generally from developed countries? If so, how does the European debt crisis factor into their safety or desirability? I didn't see a foreign bond fund on Vanguard's site, which was surprising since they have foreign equity funds. Does anyone know why they don't offer one?


They filed so to do, but AFAIK have not done so.

Safe foreign bonds do not pay attractive interest rates (Australian perhaps an exception). Unsafe ones like Italy, Spain-- well, that's credit risk.
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby Electron » Sat Sep 01, 2012 1:23 pm

Solstice wrote:I'm a little uneasy about the fact that all of our bond holdings are tied to what's happening with rates in the U.S. Are the foreign bond funds generally from developed countries?

The Morningstar Fund Screener that has been referenced in this thread has a category called World Bond. A quick search on no-load funds with expenses at 0.50% or below brings up several DFA, GMO, and PIMCO funds. You may want to think about whether you want a hedged or unhedged portfolio.
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby pingo » Sat Sep 01, 2012 4:48 pm

Not recommending you do or don't invest in foreign bonds (again, I'm a bit neutral/wishywashy, as with HY). However, as you consider the options, I recommend you read the following:

Bogleheads.org Wiki on Developed Market Bonds (which addresses foreign bonds)
Vanguard Int'l Bond--any news?
Vanguard delays international bond fund introduction
Global Fixed Income: Considerations for U.S. Investors (Vanguard White Paper)
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Powershares Fundamental High Yield Corporate Bond ETF (PHB)

Postby BornInCA » Thu Sep 27, 2012 5:21 pm

I found a high-yield fixed income ETF that doesn't own any bonds with ratings lower than "B". It's the Powershares Fundamental High Yield Corporate Bond Portfolio (PHB)

I wonder if this would be an apples-to-apples high yield bond fund in comparison to Vanguard High Yield Corporate Bond Fund (VWEHX/VWEAX) aside from the fact that PHB is an ETF and VWEAX is an open-end mutual fund. Would this be a good substitute for those that want a high quality high-yield bond fund like VWEHX while VWEHX is closed to new investors?
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Re: Powershares Fundamental High Yield Corporate Bond ETF (P

Postby Electron » Fri Sep 28, 2012 1:22 pm

BornInCA wrote:I found a high-yield fixed income ETF that doesn't own any bonds with ratings lower than "B".

Would this be a good substitute for those that want a high quality high-yield bond fund like VWEHX while VWEHX is closed to new investors?

Most ETFs are passively managed to track an index as opposed to actively managed mutual funds such as VWEHX. Expenses will be higher and an ETF may also trade above or below NAV depending on demand in the market.

I think there are half a dozen or so High Yield Bond ETFs available. It might help to research each one and make a table listing the index, expenses, average credit quality, past performance, and other pertinent factors. Morningstar might be a good site to use, and one can also compare performance of one or more of the ETFs to any of the actively managed funds.

A number of articles have suggested that it is best to trade against the crowd in High Yield Bond ETFs to get the best price. You should be able to buy at a discount to NAV if High Yield Bonds are selling off. The market price may be at a premium to NAV when there is a lot of demand on the buy side.
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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby xram » Thu May 02, 2013 8:41 pm

Bump bump
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Re: Powershares Fundamental High Yield Corporate Bond ETF (P

Postby Kevin M » Fri May 03, 2013 12:37 am

BornInCA wrote:I found a high-yield fixed income ETF that doesn't own any bonds with ratings lower than "B". It's the Powershares Fundamental High Yield Corporate Bond Portfolio (PHB)

I wonder if this would be an apples-to-apples high yield bond fund in comparison to Vanguard High Yield Corporate Bond Fund (VWEHX/VWEAX) aside from the fact that PHB is an ETF and VWEAX is an open-end mutual fund. Would this be a good substitute for those that want a high quality high-yield bond fund like VWEHX while VWEHX is closed to new investors?

I've owned PHB, along with HYG and JNK for a few years, and have owned the Vanguard high-yield bond fund for longer than that. PHB has been the worst performer of them all. It dropped the most in late 2008, and recovered the least.

JNK and HYG have tracked pretty closely, with the Vanguard fund beating them both by a bit. PHB has been the dog of the group over the last 1 yr, 3 yrs, and 5 yrs (look at them on a morningstar chart, starting with the vanguard fund so you see growth of $10K). From historical performance, I'd say JNK or HYG are better substitutes for the Vanguard fund. You can trade HYG commission free at Fidelity, not that it makes much difference. JNK had the lowest ER last time I checked, which was quite a while ago. I sold my HYG in my Fidelity IRA account within the last few months (I wanted to raise some cash to transfer out and buy a CD, and since it was commission free to sell, what the heck).

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Re: Alternative to Vanguard High-Yield Corporate fund?

Postby Mel Lindauer » Fri May 03, 2013 1:47 am

Solstice wrote:Can anyone recommend a good alternative to Vanguard's High Yield Corporate fund (which is now closed)? Something with low fees.

Thanks


If you're Flagship, you can get into the closed Vanguard fund.
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