grabiner wrote:The two funds have different types of risk. Short-Term Investment-Grade holds almost entirely corporate bonds, so it is sensitive to credit risk; Total Bond Market holds a lot of government bonds but has a longer duration, so it is more sensitive to interest-rate risk but less sensitive to credit risk.
Thus, in 2008, when investors didn't trust anyone other than the government, corporate bond prices fell, and Total Bond Market performed much better than all-corporate funds. In 2009, with the recovery in corporate bond prices, Short-Term Investment-Grade did very well.
One reason for the outperformance of Total Bond Market is that interest rates have been falling or steady for a long time. If rates rise significantly, as they did in 1994, short-term bonds will do better (and you can see this if you chart the funds back to inception).
In the long run, I would expect Short-Term Investment-Grade to be slightly less risky, and thus to have lower returns. And bond investors seem to agree; Short-Term Investment-Grade has a 1.17% yield on Admiral shares, while Total Bond Market has a 1.64% yield on Admiral shares.
Munir wrote: Why is the Short Term Investment Grade doing better YTD than Total Bond Index when interest rates have not changed much during this period- not that such a short period of time means much anyway?
garlandwhizzer wrote:[quote="Munir'] wrote: Why is the Short Term Investment Grade doing better YTD than Total Bond Index when interest rates have not changed much during this period- not that such a short period of time means much anyway?[/quote]
Because investors fearing the negative effects of rising interest rates on longer duration bonds don't wait for interest rates to rise to shorten the duration of their bond holdings. They often pre-emptively move into shorter duration funds before that event actually happens which is why short term has done much better relative to intermediate term this year as opposed to past years. Much of the loss of principal in longer duration bond funds historically occurs before rate changes as investors anticipate rising interest rates and position themselves for it.[/quote]
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