Why does Vanguard's Short-Term Corporate Bond fund outperform iShares'?

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danielc
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Why does Vanguard's Short-Term Corporate Bond fund outperform iShares'?

Post by danielc » Sun Nov 17, 2019 1:46 am

Hello,

I'm looking for a short-term bond fund to park my emergency fund. Two candidates include Vanguard's Short-Term Corporate Bond ETF (VCSH) and iShares' Short-Term Corporate Bond ETF (IGSB). On paper they look nearly identical, but according to the portfolio visualizer Vanguard's fund has done quite a bit better than iShares' since its inception, and I was hoping that someone here might know why Vanguard seems to do better:

1) They have the same ER, yield, and duration.

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                   Vanguard     iShares
Expense Ratio      0.07%        0.06%
SEC Yield          2.24%        2.27%
Duration           2.6 yr       2.6 yr
2) They invest in bonds of nearly the same credit quality (iShares is a tiny bit lower credit quality, and has more cash).

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          Vanguard  |                     iShares
Aaa        1.5%     | AAA                  0.96%
Aa        11.5%     | AA                  10.23%
A         40.9%     | A                   41.13%
Baa       46.2%     | BBB                 46.18%
US Gov't  -0.1%     | BB                   0.22%
                    | Cash + Derivatives   1.28%   
3) But according to portfolio visualizer, since it's inception (in 2011) Vanguard's fund has beaten iShare's by a full percent point without a proportional increase in risk:

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                 Vanguard     iShares
CAGR             2.89%        1.85%
Stdev            1.73%        1.15%
Worst Year       0.88%        0.44%
Max Down        -1.58%       -1.20%
Sharpe ratio     1.35         1.18
The difference between 1.85% and 2.89% seems large for short term corporate bonds of the same duration and credit quality. How does Vanguard do it? Is there a catch that I cannot see?

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Tyler Aspect
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Re: Why does Vanguard's Short-Term Corporate Bond fund outperform iShares'?

Post by Tyler Aspect » Sun Nov 17, 2019 2:23 am

You need to research these funds' past expense ratios. They will probably be different.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

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Re: Why does Vanguard's Short-Term Corporate Bond fund outperform iShares'?

Post by danielc » Sun Nov 17, 2019 2:39 am

Tyler Aspect wrote:
Sun Nov 17, 2019 2:23 am
You need to research these funds' past expense ratios. They will probably be different.
By an entire percent point? I doubt it.

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Re: Why does Vanguard's Short-Term Corporate Bond fund outperform iShares'?

Post by danielc » Sun Nov 17, 2019 3:38 am

The prospectus for iShares IGSB says
"Prior to the selection of the Underlying Index on August 1, 2018, the Fund tracked the Bloomberg Barclays U.S. 1-3 Year Credit Bond Index"
If so, then IGSB most likely had a shorter duration than it does today. Today iShares IGSB and Vanguard VCSH both track indices (not the same index) with 1-5 Year corporate bonds. So the lower duration of IGSB prior to Aug 2018 could explain the different return.

As an aside, there may be additional differences in the index that I'm not aware of. IGSB tracks the BofAML 1-5 Year US Corporate Index (BofAML = Bank of America Merrill Lynch) and VCSH tracks the Bloomberg Barclays U.S. 1–5 Year Corporate Bond Index.

EDIT: Wait! iShare's old index was not even a true "corporate bond" index. The index "is composed of a corporate and a non-corporate component that includes non-US agencies, sovereigns, supranationals and local authorities" (link, also link). So it is a fundamentally different index. I suspect that the differences in the index (different duration, different issuers) probably explains the difference in performance.

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Re: Why does Vanguard's Short-Term Corporate Bond fund outperform iShares'?

Post by sycamore » Sun Nov 17, 2019 8:48 am

I think you figured it out.

Lots of funds have changed their index or composition over time. Sure makes it hard to do straight-up comparisons. Not sure if portfoliovisualizer (or other sites) have a feature to flag a holding that's changed its index over time.

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