How safe is Vanguard Short-Term Federal Fund

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invstar
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How safe is Vanguard Short-Term Federal Fund

Post by invstar » Sun Jun 28, 2020 10:30 am

As all the savings accounts/CDs are offering very low interest rates now, I am considering moving my money into VSGBX / VSGDX (admiral / investor shares of Vanguard Short-Term Federal Fund). I see that above 90%+ of assets of invested in government funds/assets. This fund is 30-day SEC yield right now is 1.41/1.31%. Do you recommend investing around 100k into this fund? Thanks.

livesoft
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Re: How safe is Vanguard Short-Term Federal Fund

Post by livesoft » Sun Jun 28, 2020 10:41 am

In general, I do not recommend investing in safe investments because their expected future long-term return is lower than that of riskier investments.
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Kenkat
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Re: How safe is Vanguard Short-Term Federal Fund

Post by Kenkat » Sun Jun 28, 2020 10:44 am

It is obviously very safe from a credit risk standpoint; it will have some limited interest rate risk. If interest rates were to suddenly rise, the fund would lose a little value but over a relatively short time, increased interest rate payments would make up for the drop.

If you are looking for something that will absolutely not go down in value, CDs or an online savings account would be your best bet.

If you are looking to park $100k for a few years and don’t mind some minor fluctuations, this fund would be a reasonable choice.

retired@50
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Re: How safe is Vanguard Short-Term Federal Fund

Post by retired@50 » Sun Jun 28, 2020 10:48 am

I found the following passage in the fund description somewhat interesting. My emphasis.
The fund’s investment objective is to seek to provide current income while maintaining limited price volatility. Under normal circumstances, the fund will invest at least 80% of its assets in short-term bonds issued or guaranteed by the U.S. government and its agencies, many of which are not backed by the full faith and credit of the U.S. government.
If you're willing to accept this risk, then great. If you're looking for a savings account, try elsewhere.

Regards.
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anon_investor
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Re: How safe is Vanguard Short-Term Federal Fund

Post by anon_investor » Sun Jun 28, 2020 10:56 am

The fund has an average duration of 2 years. So if the OP wants to invest for 2+ years, it would be pretty safe.

tealeaves
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Re: How safe is Vanguard Short-Term Federal Fund

Post by tealeaves » Sun Jun 28, 2020 11:29 am

I like and use this fund, but will probably move to a longer duration treasury fund if/when the yields merit the change

JackoC
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Re: How safe is Vanguard Short-Term Federal Fund

Post by JackoC » Sun Jun 28, 2020 1:50 pm

retired@50 wrote:
Sun Jun 28, 2020 10:48 am
I found the following passage in the fund description somewhat interesting. My emphasis.
The fund’s investment objective is to seek to provide current income while maintaining limited price volatility. Under normal circumstances, the fund will invest at least 80% of its assets in short-term bonds issued or guaranteed by the U.S. government and its agencies, many of which are not backed by the full faith and credit of the U.S. government.
If you're willing to accept this risk, then great. If you're looking for a savings account, try elsewhere.
It does involve risks which mainly explain why the SEC yield of VSGDX is 1.41% while that of VFIRX (admiral short term treas) is only 0.33% though both have a ~2 yr duration. However it's not mainly pure credit risk IMO. There's a marginal true credit risk difference between treasuries and the mainly only implicitly federally backed securities that mainly comprise VSGDX. But more of it is the fact that the market will tend to disfavor non treasury govt 'affiliated' securities in times of liquidity stress: there's a yield premium to bear that risk. And part is the interest rate optionality of the implicitly gteed securities particularly the mortgage bonds which comprise ~2/3's of the fund. Those will increase in duration if rates go up, aka have negative convexity. Again the market demands yield compensation for that.

Anyway if any of that is gilding the lily, I basically agree: there has to be a risk reason, whatever it is, that one 2 yr duration fund full of professional market priced securities has yield 0.33% and another 1.41%*. OTOH the absolute highest yielding 2 yr CD's are ~1.50%** with practically the same credit risk as treasury, no interest rate optionality against you like mortgage backed, and you place the money for 2 yrs in CD only if a pretty low chance you need it prior, so the illiquidity is irrelevant. And the CD will redeem at face in 2 yrs whereas VSGDX will be still be 2 yr duration instrument 2 yrs from now and will be discounted if the market happens to be suffering another liquidity crisis just then. Also, CD's can just be a better deal (some CD's are obviously better deals than others with no real risk reason at least is obvious) because they are priced in the inefficient retail depositor market. A truly better deal is not virtually instantly arb'd away by professionals as in treasury or agency securities markets.

I personally would go CD in the current market for money I might need in 2yr but not likely before. For part of a safe allocation one has already decided on that is. I assume OP isn't asking 'should I invest in stocks or relatively safe short term debt instruments?' which is a different issue.

*although 30 day SEC yields have a backward looking element that sometimes makes them worse than useless, like at times earlier this year. Right now debt markets have stable enough over the past month that 30 day SEC yield is a useful if still not 100% precise measure.
**there will be different state tax treatment among the three, though that depends on individual situation so no generalization can be made. Treasury interest isn't state taxable, around 1/2 of VSGDX was state taxable in 2019, all of CD interest will be.

Topic Author
invstar
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Re: How safe is Vanguard Short-Term Federal Fund

Post by invstar » Mon Jun 29, 2020 7:56 am

Thank you all. Very useful information.

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