Corporate and High Yield Bonds as Stock/Government Bond Hybrids

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
Posts: 619
Joined: Sat Nov 06, 2010 4:56 pm

Corporate and High Yield Bonds as Stock/Government Bond Hybrids

Post by Park » Sun Aug 05, 2018 11:02 pm

The following is for novice investors, like myself.

Jared Kizer, from BAM, did an analysis a few years ago on this. Unfortunately, I don't think all the data, that he originally presented, is there anymore. Nevertheless, I think the following is useful:

"I ran an analysis to determine what allocation between Vanguard’s S&P 500 fund (VFINX) and Vanguard’s Intermediate-Term Treasury fund (VFITX) would have historically most closely replicated the performance of Vanguard’s High Yield Corporate fund (VWEHX). (I used the period of November 1991 through April 2013, as this is the longest period of time that I had returns data for all three funds.)If my theory is true, we should see that the performance of VWEHX and the portfolio of VFINX and VFITX are basically the same or that the stock and bond fund portfolio has actually done better. If my theory doesn’t hold up, VWEHX should have outperformed the stock and bond fund portfolio.

This analysis finds that an allocation of 37 percent to VFINX and 63 percent to VFITX has most closely tracked the performance of the high yield fund. Here’s the performance comparison of those two portfolios:

I’m not making those numbers up, folks. The two portfolios generated virtually the same long-run return, but the stock and bond portfolio had a better risk-adjusted return due to lower volatility. The analytic conclusion is that there’s not much special about high-yield corporate bonds that investors couldn’t get by putting about 40 percent in stocks and 60 percent in high-quality bonds." ... bond-fund/

"We used the same funds as we did last week: Vanguard’s S&P 500 fund (VFINX) for stocks and Vanguard’s Intermediate-Term Treasury fund (VFITX) for high-quality bonds. This time, we’ll use Vanguard’s Intermediate-Term Investment Grade fund (VFICX) as the bogey. The period is the longest available: December 1993 (first full month of returns for VFICX) through April 2013.

In this case, an allocation of 12 percent in VFINX and 88 percent in VFITX does the best job of tracking investment-grade corporate bonds. The result is similar to what we saw last week with high-yield bonds: You can effectively get the same returns of investment-grade corporate bonds with less risk (and also more tax efficiency if the positions would be held in a taxable account)." ... bond-fund/

So using stocks and government bonds, instead of corporate and high yield bonds, may result in lower taxation, lower costs (lower trading costs and less need for diversification), higher liquidity and greater control over your stock/bond allocation. About the final point, the correlation of high yield bonds with stocks varies over time; the correlation can increase just when you don't want it to, such as in 2007-2009. He also makes the point that for the same return, volatility may be lower.

Post Reply