Short Term Bond Funds VSCSX and VFSUX - An Interesting Comparison

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Electron
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Short Term Bond Funds VSCSX and VFSUX - An Interesting Comparison

Post by Electron » Fri Nov 15, 2019 2:08 pm

I've taken some data on Vanguard Short Term Bond Funds VSCSX and VFSUX and wonder if anyone has any comments.

VSCSX is a short term corporate bond index fund while VFSUX is an actively managed short term bond fund.

I found two things of interest since the beginning of the year. A hypothetical purchase of $100K was made in each fund on 12-31-18. At the time, the SEC yield on VSCSX was 3.68% while the SEC yield on VFSUX was 3.39%. Despite the higher SEC yield on VSCSX, VFSUX paid out more income over the next ten months. VFSUX paid out $2505.18 versus $2467.00 from VSCSX.

The overall performance of the two funds since mid 2015 is also quite interesting as can be seen in the chart below. The chart shows the SEC yield of each fund and the ratio of the NAV of the two funds. You will see that VSCSX had a higher SEC yield than VFSUX through mid August of this year. Since then, the SEC yield of VSCSX has dropped below that of VFSUX.

In terms of total return, VSCSX outperformed VFSUX as a result of greater increase in NAV. As of 11-14-19, year-to-date total returns are 6.39% for VSCSX versus 5.45% for VFSUX.

Does VFSUX look more attractive at present with the higher SEC yield?

VSCSX performed very well in the bond rally this year but you wonder if the fund may be somewhat extended.

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Re: Short Term Bond Funds VSCSX and VFSUX - An Interesting Comparison

Post by quisp65 » Fri Nov 15, 2019 2:47 pm

All the corporate index bond funds like VSCSX scare me because I note they have a whole lot of bonds a step above junk. If VSCSX was around in 2008, it would not surprise me to see a 20% loss. I prefer VFSUX over VSCSX because I think the index adds a lot of more risk with little benefit. VSCSX didn't make enough extra to be worth the risk IMO.

I'm leaning toward making VFSUX for my 2 year cash fund that will be my living expense pot. I was thinking VBIRX was safer and it didn't shoot down in 2008 but it frequently doesn't keep up with inflation. I figure VFSUX can go 10 years and about break even with another 7% loss it had in 2008. I note the only big loss VFSTX ( the non-admiral equivalent with longer history) had was in 2008, so I figure using it as my 2 year cash fund is worth the risk.
Last edited by quisp65 on Fri Nov 15, 2019 2:54 pm, edited 1 time in total.

livesoft
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Re: Short Term Bond Funds VSCSX and VFSUX - An Interesting Comparison

Post by livesoft » Fri Nov 15, 2019 2:51 pm

I have owned both these funds over the years, but now own neither of them. My rule which seems to work rather well is this:
The one that you buy will underperform the other one.

Thus it makes no real sense to do comparison or ask questions about these funds since the future is unpredictable.

However, what does work is to pick one and the total US bond index fund and then rebalance periodically among the short-term and the intermediate term. For instance, morningstar.com shows in a "growth-of" chart the VBTLX and VSCSX periodically switch places on which one has the better past 3-year total return.

I realize my response is not what you wanted to get.
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Re: Short Term Bond Funds VSCSX and VFSUX - An Interesting Comparison

Post by Electron » Fri Nov 15, 2019 4:39 pm

Thanks quisp65 and livesoft for the replies. I've also been concerned about the risk inherent in VSCSX with the large percentage in A and Baa rated securities. There is also a very heavy weighting in financial stocks.

That's an excellent point about the fund performance had it existed in 2008. All three of Vanguard's Corporate Bond Index funds appear to track Bloomberg Barclays U.S. Corporate Bond Indexes of different maturities. I don't believe there is any historical data available for these indexes prior to the inception of the funds.

One other concern is that these funds may be moving targets in terms of portfolio composition. Corporate bond issuance has been very heavy in recent years taking advantage of low interest rates. I assume the indexes and funds continually incorporate the changes as a result.
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