Explanation for yield of Intermediate-Term Investment-Grade

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Explanation for yield of Intermediate-Term Investment-Grade

Postby grabiner » Sat Jul 27, 2013 3:54 pm

In another thread, I noticed that Intermediate-Term Investment-Grade appeared to have an unusually low yield, and now I discovered the reason; it has a significantly shorter duration than its benchmark. It holds bonds with 5-10 years to maturity, which should give it an average maturity of 7.5 years, but the actual average maturity is 6.5, and that also leads to a shortening of duration by one year.

Comparing the Admiral shares of the investment-grade funds to the ETFs which track the benchmarks:

Short-term: 1.52% versus 1.67% SEC yield, 1.6% versus 1.9% YTM, duration 2.4 versus 2.9 years
Intermediate-term: 2.87% versus 3.45% SEC yield, 2.9% versus 3.6% YTM, duration 5.4 versus 6.5 years
Long-term: 4.75% versus 5.01% SEC yield, 5.0% versus 5.2% YTM, duration 13.4 versus 13.3 years

(The investment-grade funds hold some Treasuries, which is part of the reason they have slightly lower yields.)

If the intermediate-term fund had the same SEC yield as its benchmark, it would presumably have an SEC yield of about 3.2%.

This also explains why Intermediate-Term Bond Index has almost as high a yield (2.64%) as Intermediate-Term Investment-Grade; the index is half Treasuries, which yield much less than corporates, but it has a duration 1.2 years longer, for more interest-rate risk.
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Re: Explanation for yield of Intermediate-Term Investment-Gr

Postby bayview » Sat Jul 27, 2013 4:09 pm

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Last edited by bayview on Sun Jul 28, 2013 1:53 pm, edited 1 time in total.
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Re: Explanation for yield of Intermediate-Term Investment-Gr

Postby Sidney » Sat Jul 27, 2013 4:53 pm

Also putting a drag on yield, it has 2.4% short term reserves and 6.5% of the bonds are in US Government issues.
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Re: Explanation for yield of Intermediate-Term Investment-Gr

Postby Doc » Sat Jul 27, 2013 5:29 pm

grabiner wrote:In another thread, I noticed that Intermediate-Term Investment-Grade appeared to have an unusually low yield, and now I discovered the reason; it has a significantly shorter duration than its benchmark. It holds bonds with 5-10 years to maturity, which should give it an average maturity of 7.5 years, but the actual average maturity is 6.5, and that also leads to a shortening of duration by one year.


There is more than just the duration going on here I think. The BarCap Intermediate Government Credit Index (1-10) has ~65 to 70 % AAA bonds as indicated by the IShares ETF GVI (current) and Barclays site (2010 data). Yet the Vg Intermediate Investment Grade fund is only 20% AAA. It is hard to believe that the 1-5 credit breakdown is all that much different from the 1-10 or the 5-10.

There was a time in the past when Vg used its lower e/r to actually increase its credit rating. This doesn't seem to be what's going on here. It appear tha Vg may be trading credit risk for term risk. :?:

grabiner wrote:Comparing the Admiral shares of the investment-grade funds to the ETFs which track the benchmarks


What ETF are you using to track the 5-10 benchmark? BarCap's Intermediate Gov/Credit index is 1-10 and I haven't found an ETF that tracks the 5-10.
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Re: Explanation for yield of Intermediate-Term Investment-Gr

Postby MnD » Sat Jul 27, 2013 5:44 pm

I'm confused. The Vanguard Investment Grade bond funds (short, int and long) are not straight corporate bond funds (short medium and long).
Those are a different Vanguard product and the latter are available only in ETF, Institutional and Signal shares.
The former varieties of course contain bonds other than corporates. The products also track different indices.

https://advisors.vanguard.com/VGApp/iip ... rkBarclays
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Re: Explanation for yield of Intermediate-Term Investment-Gr

Postby Artsdoctor » Sat Jul 27, 2013 6:31 pm

MnD,

You're not confused at all. Your link is extremely helpful.

The Investment Grade FUND is different than the Investment Grade ETF. Their portfolios are different and track different indices (which you pointed out in the link).

I wish I had access to the Signal or Institutional shares of the corporate fund, but I've had to settle for the ETF (VCIT). I don't like the delay in reinvesting dividends, the unpredictability of reinvestment prices, and the necessity of dealing with bid/ask spreads. I hold VCIT in both Fidelity and Schwab retirement accounts and it is aggravating to see the (sometimes significant) price the reinvested dividend is purchased for in those accounts.

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Re: Explanation for yield of Intermediate-Term Investment-Gr

Postby grabiner » Sun Jul 28, 2013 10:06 am

Doc wrote:
grabiner wrote:In another thread, I noticed that Intermediate-Term Investment-Grade appeared to have an unusually low yield, and now I discovered the reason; it has a significantly shorter duration than its benchmark. It holds bonds with 5-10 years to maturity, which should give it an average maturity of 7.5 years, but the actual average maturity is 6.5, and that also leads to a shortening of duration by one year.


There is more than just the duration going on here I think. The BarCap Intermediate Government Credit Index (1-10) has ~65 to 70 % AAA bonds as indicated by the IShares ETF GVI (current) and Barclays site (2010 data). Yet the Vg Intermediate Investment Grade fund is only 20% AAA. It is hard to believe that the 1-5 credit breakdown is all that much different from the 1-10 or the 5-10.


The fund data says that Intemediate-Term Investment-Grade uses the Barclays 5-10 Credit Index as its benchmark, and that benchmark is entirely corporate. The fund has an R^2 of 0.98, indicating that the benchmark is reasonable (the R^2 to the BarCap Aggregate is 0.72), but a beta of 0.84, indicating that it has been less volatile than the benchmark.

The lower beta also explains why Intermediate-Term Investment-Grade has undeperformed its benchmark, as has Short-Term Investment-Grade, with a beta of 0.73. Meanwhile, Long-Term Investment-Grade, with a beta of 1.01, has outperformed its benchmark.

My conclusion is that all three investment-grade funds are doing what they should be doing, but the difference between the fund and benchmark duration means that the ETFs are not perfect replacements for the funds. If you switch from funds to ETFs and replace Intermediate-Term Investment-Grade by VCIT, you have slightly increased the risk (and expected return) of your portfolio; 80% VCIT and 20% VCSH would keep about the same risk.

(edited to fix typo)
Last edited by grabiner on Sat Aug 31, 2013 7:12 pm, edited 1 time in total.
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Re: Explanation for yield of Intermediate-Term Investment-Gr

Postby Artsdoctor » Sun Jul 28, 2013 11:16 am

David,

I see what you mean about benchmarks. But the Vanguard Intermediate-Term Investment-Grade (VFIDX) fund does not appear to be tracking the Barclays US 5-10 Year Corp Index as closely as the Intermediate-Term Corporate Bond Index Fund Institutional Shares (VICBX, or its ETF VCIT). VFIDX has a smattering of treasuries (listed as 6.5%) and the credit quality is higher by quite a bit. Additionally, the average duration of VICBX matches the benchmark perfectly while the duration of VFIDX is a full year less. Consequently, the return and risk of VFIDX would be expected to be lower.

I must admit that I had originally thought that VCIT was the ETF version of VFIDX but I was mistaken. I can't really blame the names because they are different as well (intermediate investment grade is different than intermediate corporate). But VCIT (or the elusive VICBX) is the mirror of the benchmark, not VFIDX.

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Re: Explanation for yield of Intermediate-Term Investment-Gr

Postby Doc » Sun Jul 28, 2013 11:39 am

I often get misled by active funds that which use a benchmark that is different from their policy objective. In this case David pointed out that the Vg Intermediate Investment Grade bond fund has a shorter duration than its benchmark. It also has a higher credit quality. Both factors would contribute to its having a lower SEC yield than its benchmark.

grabiner wrote:In another thread, I noticed that Intermediate-Term Investment-Grade appeared to have an unusually low yield, and now I discovered the reason; it has a significantly shorter duration than its benchmark.


grabiner wrote:The fund data says that Intermediate-Term Investment-Grade uses the Barclays 5-10 Credit Index as its benchmark, and that benchmark is entirely corporate.


grabiner wrote:The lower beta also explains why Intermediate-Term Investment-Grade has underperformed its benchmark

Engineer seeing the same thing different than the mathematician. Beta is the effect (metric). Duration and credit quality are the causes (reason). :)

grabiner wrote:The fund data says that Intermediate-Term Investment-Grade uses the Barclays 5-10 Credit Index as its benchmark, and that benchmark is entirely corporate.


Prospectus wrote: Primary Investment Strategies
The Fund invests in a variety of high-quality and, to a lesser extent, medium-quality
fixed income securities, at least 80% of which will be short- and intermediate-term
investment-grade securities. High-quality fixed income securities are those rated the
equivalent of A3 or better by Moody‘s Investors Service, Inc.,]


The BarCap Credit Index has some 35% rates below Aaa and does not include Treasuries, agencies or securitized debt unlike the VG Investment grade fund.

https://ecommerce.barcap.com/indices/ac ... =9&collar=
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