Vanguard Ultra Short vs Short-Term Bond Index

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Vanguard Ultra Short vs Short-Term Bond Index

Post by Doc »

Vanguard Ultra Short has been around now for a little over five years. I wondered how it was doing.

"Product summary
The fund’s investment objective is to seek to provide current income while maintaining limited price volatility. The fund invests in a diversified portfolio of high-quality and, to a lesser extent, medium-quality fixed income securities"
https://investor.vanguard.com/mutual-fu ... view/vubfx

VUBFX: Ultra Short
VBIRX: Short-Term Index

Growth:

Image

Price:

Image

Any thoughts?
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by 000 »

Chart looks somewhat like FLOT and FLTR in March.

Everything's fine until a liquidity crisis happens.

If you need liquidity, there is no replacement for cash, i.e. a bank account or physical bills.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by stlutz »

Looks like interest rates went down in 2020.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by marcwd »

VUBRX SEC yield is pitiful given its short, but non-zero term risk.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by absolute zero »

000 wrote: Wed Oct 07, 2020 5:34 pm Chart looks somewhat like FLOT and FLTR in March.

Everything's fine until a liquidity crisis happens.

If you need liquidity, there is no replacement for cash, i.e. a bank account or physical bills.
The ultrashort bond fund fell a whopping 1.5% during that brief liquidity crunch.

I certainly have no interest in a bond fund with such low duration, but for those interested in highly liquid funds with near zero volatility, I struggle to see how it’s any worse or different than cash.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by absolute zero »

One of these funds has a duration of 2.8 years; the other has a duration of 0.9 years.

My takeaway is that one fund (Vanguard Short term) is an excellent investment for a 93 year old, but might be too risky for a 95 year old. The ultra short term would be more appropriate for the 95 year old.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by Random Musings »

When the crisis occurred earlier this year, the ultra short was not any safer in terms of price downside compared to the short term bond. When blood starts pouring on the streets, I can kinda get that.
However, when the markets turned around in a V rebound, the ultra short lacked the quick rebound.

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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by 000 »

absolute zero wrote: Wed Oct 07, 2020 10:09 pm
000 wrote: Wed Oct 07, 2020 5:34 pm Chart looks somewhat like FLOT and FLTR in March.

Everything's fine until a liquidity crisis happens.

If you need liquidity, there is no replacement for cash, i.e. a bank account or physical bills.
The ultrashort bond fund fell a whopping 1.5% during that brief liquidity crunch.

I certainly have no interest in a bond fund with such low duration, but for those interested in highly liquid funds with near zero volatility, I struggle to see how it’s any worse or different than cash.
Losing more than two years worth of yield during a liquidity crunch is not acceptable for a liquidity fund. And that's with the Fed intervention.

Considering that HYSAs at 0.60% (at possibly higher) are still available, it's hard to pass up FDIC insurance and guaranteed principal on demand for a fund investing in corporate bonds that is yielding 0.70%. Seems like extreme yield chasing to me. Unless one believes corporates are safer than FDIC.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by Van »

Doc,

I would be interested in your thoughts. You are much more knowledgeable about bond funds than most that regularly contribute to this forum.

Van
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by jeffyscott »

absolute zero wrote: Wed Oct 07, 2020 10:09 pm
000 wrote: Wed Oct 07, 2020 5:34 pm Chart looks somewhat like FLOT and FLTR in March.

Everything's fine until a liquidity crisis happens.

If you need liquidity, there is no replacement for cash, i.e. a bank account or physical bills.
The ultrashort bond fund fell a whopping 1.5% during that brief liquidity crunch.

I certainly have no interest in a bond fund with such low duration, but for those interested in highly liquid funds with near zero volatility, I struggle to see how it’s any worse or different than cash.
As a substitute for cash, can compare to prime money market.

Image

Could also be compared to other similar funds, which those floating rate/bank loan ETFs are not. Some of the other ultrashort funds, with low-ish ERs would be Fidelity Conservative income (FCONX), Payden Limited Maturity (PYLMX), and T. Rowe Ultrashort (TRBUX). Based on the drop they all experienced in March, the Vanguard fund seems to be the least volatile of them.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by Angst »

absolute zero wrote: Wed Oct 07, 2020 10:09 pm
000 wrote: Wed Oct 07, 2020 5:34 pm Chart looks somewhat like FLOT and FLTR in March.

Everything's fine until a liquidity crisis happens.

If you need liquidity, there is no replacement for cash, i.e. a bank account or physical bills.
The ultrashort bond fund fell a whopping 1.5% during that brief liquidity crunch.

I certainly have no interest in a bond fund with such low duration, but for those interested in highly liquid funds with near zero volatility, I struggle to see how it’s any worse or different than cash.
Why are so many posts here comparing Vanguard's Ultra-ST bond to cash? Cash has nothing to do with the OP which is comparing VUBFX to VBIRX.

Vanguard's Ultra Short Term bond fund has performed a lot like a decent bond fund with a 0.9 year duration ought to perform, and that "whopping" drop during the pandemic was entirely subsumed within roughly half of that duration. Sounds alright to me. For anyone who measures the duration of their need for certain dollars in days and not in months, neither of the funds addressed in the OP are where you want to be investing those dollars. There are plenty of other threads discussing cash and online savings accounts and MM funds.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by jeffyscott »

Angst wrote: Thu Oct 08, 2020 9:13 amWhy are so many posts here comparing Vanguard's Ultra-ST bond to cash? Cash has nothing to do with the OP which is comparing VUBFX to VBIRX.
Perhaps because it is unclear what the purpose of the comparison is?

VUBFX differs from VBIRX in two dimensions, duration and credit quality. The short term index is about 2/3 Treasury and agency bonds and has a duration of 2.8 years, Ultrashort has a duration of 0.9 years and no treasury or agency bonds.

Maybe the purpose here was to compare the results of trading off credit risk for duration risk :?: , but if so, then why not compare to short term treasury or short term federal instead?
Vanguard's Ultra Short Term bond fund has performed a lot like a decent bond fund with a 0.9 year duration ought to perform
Yes, as would be expected, the performance and volatility falls between that of short term bond funds such as VBIRX and money market fund.

Image
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by 000 »

Angst wrote: Thu Oct 08, 2020 9:13 am Why are so many posts here comparing Vanguard's Ultra-ST bond to cash? Cash has nothing to do with the OP which is comparing VUBFX to VBIRX.
Because it is yielding 0.70% to an FDIC insured cash account yielding 0.60%.

And because most people don't need a <1yr duration corporate bond fund.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by Doc »

Thanks Jeffy.
jeffyscott wrote: Thu Oct 08, 2020 9:55 am VUBFX differs from VBIRX in two dimensions, duration and credit quality. The short term index is about 2/3 Treasury and agency bonds and has a duration of 2.8 years, Ultrashort has a duration of 0.9 years and no treasury or agency bonds.

Maybe the purpose here was to compare the results of trading off credit risk for duration risk , but if so, then why not compare to short term treasury or short term federal instead?
"Maybe the purpose here was to compare the results of trading off credit risk for duration risk".

Yep

"... then why not compare to short term treasury or short term federal instead?"

I use short Treasury as part of my overall FI portfolio not as a "stand alone". Not federal because of the MBS per Swedroe. But I don't expect everyone to have the same purpose for their short term bond fund.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by Doc »

Van wrote: Thu Oct 08, 2020 6:00 am Doc,

I would be interested in your thoughts. You are much more knowledgeable about bond funds than most that regularly contribute to this forum.

Van
I am trying not guide the discussion. Maybe later.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

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Doc wrote: Thu Oct 08, 2020 10:29 am Thanks Jeffy.
jeffyscott wrote: Thu Oct 08, 2020 9:55 am VUBFX differs from VBIRX in two dimensions, duration and credit quality. The short term index is about 2/3 Treasury and agency bonds and has a duration of 2.8 years, Ultrashort has a duration of 0.9 years and no treasury or agency bonds.

Maybe the purpose here was to compare the results of trading off credit risk for duration risk , but if so, then why not compare to short term treasury or short term federal instead?
"Maybe the purpose here was to compare the results of trading off credit risk for duration risk".

Yep

"... then why not compare to short term treasury or short term federal instead?"

I use short Treasury as part of my overall FI portfolio not as a "stand alone". Not federal because of the MBS per Swedroe. But I don't expect everyone to have the same purpose for their short term bond fund.
While it doesn't relate to a comparison of the past history, at this time neither fund is worth holding to me, especially when looking at a stand alone (I assume) cash substitute, for this reason:
000 wrote: Thu Oct 08, 2020 10:28 am Because it is yielding 0.70% to an FDIC insured cash account yielding 0.60%.
I'm getting 0.5% in my savings account, but could easily switch the small amount there to a savings account at 0.7% or above.

VBIRX SEC yield is even lower at 0.33%. No thanks :!:

At least in the case of short and ultrashort term bond funds, I don't want to count on making up for low current yields via cap gains due to a fall in prevailing interest rates and so have been phasing out in favor of direct CDs. I have exited short term inflation protected and greatly decreased ultra-short term bond fund holdings over the past 3-4 months. Besides a small amount in a savings account, I had opened one 3 yr CD at 1.9% and another 18 mo. (add on) one at 2%.

In the unlikely event that we were to need or want cash beyond what is in savings, I'd raise it by selling from intermediate bond funds or stock funds and leave the CDs alone.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by Doc »

jeffyscott wrote: Thu Oct 08, 2020 11:00 am While it doesn't relate to a comparison of the past history, at this time neither fund is worth holding to me, especially when looking at a stand alone (I assume) cash substitute, for this reason:
I don't disagree but I never said anything about "cash substitute". :D
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Re: Vanguard Ultra Short vs Short-Term Bond Index

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Doc wrote: Thu Oct 08, 2020 11:14 am
jeffyscott wrote: Thu Oct 08, 2020 11:00 am While it doesn't relate to a comparison of the past history, at this time neither fund is worth holding to me, especially when looking at a stand alone (I assume) cash substitute, for this reason:
I don't disagree but I never said anything about "cash substitute". :D
:beer
But do you not disagree with the full statement or just the "especially" part.
I can see no reason at all to hold either fund at this time. If the purpose were a cash substitute that would just make it especially so.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by patrick »

000 wrote: Thu Oct 08, 2020 10:28 am
Angst wrote: Thu Oct 08, 2020 9:13 am Why are so many posts here comparing Vanguard's Ultra-ST bond to cash? Cash has nothing to do with the OP which is comparing VUBFX to VBIRX.
Because it is yielding 0.70% to an FDIC insured cash account yielding 0.60%.

And because most people don't need a <1yr duration corporate bond fund.
FDIC insured accounts go higher than that:

Porte Bank pays 3% on balances up to $15,000. They require $1000 of deposits in a month (an ACH push from another of your own accounts seems to qualify) to open the account.

HMBradley pays 3% on balances up to $100,000. They require direct deposit every month (payroll or government benefits) and saving at least 20% of deposits (i.e. total withdrawals no more than 80 percent of total deposits), evaluated quarterly.

Affirm, Chime, and First Foundation all pay 1% without such restrictions.
Doc wrote: Thu Oct 08, 2020 11:14 am
jeffyscott wrote: Thu Oct 08, 2020 11:00 am While it doesn't relate to a comparison of the past history, at this time neither fund is worth holding to me, especially when looking at a stand alone (I assume) cash substitute, for this reason:
I don't disagree but I never said anything about "cash substitute". :D
Cash is a good "short term bond substitute" because it both gives a higher yield and avoids the value dips mentioned earlier.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

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jeffyscott wrote: Thu Oct 08, 2020 11:40 am
Doc wrote: Thu Oct 08, 2020 11:14 am
jeffyscott wrote: Thu Oct 08, 2020 11:00 am While it doesn't relate to a comparison of the past history, at this time neither fund is worth holding to me, especially when looking at a stand alone (I assume) cash substitute, for this reason:
I don't disagree but I never said anything about "cash substitute". :D
:beer
But do you not disagree with the full statement or just the "especially" part.
I can see no reason at all to hold either fund at this time. If the purpose were a cash substitute that would just make it especially so.
I'm not looking for a cash substitute. I'm looking for a stand alone short term bond fund to use for something I might want to buy in the next several years or for some unknown expense that could arise in those several years. With the currently very low interest rates it seems more likely that rates will go up than down. Given that, the shorter term would be better (maybe?). So the comparison of the two funds is trading off the risk for interest rates rising versus the lower credit quality of the shorter term fund.

I call the position our "car" fund since we started it with the money we were using for car payments before the car was paid off. So far we have used part of the money for a new roof. :D
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by Electron »

Here is a comparison using Portfolio Visualizer.

The funds are Vanguard Short-Term Investment Grade Admiral (VFSUX), Vanguard Ultra-Short-Term Bond Admiral (VUSFX), and CASHX representing Money Market returns.

https://www.portfoliovisualizer.com/bac ... ion3_3=100

The comparison is pretty much what one might expect. Note that VUSFX outperformed VFSUX in 2018.

The latest distribution yield on VUSFX appears to be about 1.17%.

Portfolio Income has been added at the bottom of the screen.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by mokaThought »

I had been holding "cash" in BSV (VG Short-Term Bond ETF) but just sold it all to switch over to a good 'CD' offer at Navy Federal. The yield vs. risk just isn't there in short-term bond mutual funds and ETFs to justify their volatility unless the money is stuck there in a brokerage or investment account (e.g. tax-advantaged account).
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Re: Vanguard Ultra Short vs Short-Term Bond Index

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Electron wrote: Thu Oct 08, 2020 1:18 pm The funds are Vanguard Short-Term Investment Grade Admiral (VFSUX), Vanguard Ultra-Short-Term Bond Admiral (VUSFX), and CASHX representing Money Market returns.
The question concerned VUBFX: Ultra Short vs VBIRX: Short-Term Index

And it's the going forward from today's artificially low rates that I'm concerned with.

Here's a three month rolling return chart for the three funds.

Image

(Portfolio Visualizer is excellent for looking at longer term averages. For what happens in the short terms not so much.)
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Re: Vanguard Ultra Short vs Short-Term Bond Index

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Doc wrote: Thu Oct 08, 2020 2:22 pm
Electron wrote: Thu Oct 08, 2020 1:18 pm The funds are Vanguard Short-Term Investment Grade Admiral (VFSUX), Vanguard Ultra-Short-Term Bond Admiral (VUSFX), and CASHX representing Money Market returns.
The question concerned VUBFX: Ultra Short vs VBIRX: Short-Term Index

And it's the going forward from today's artificially low rates that I'm concerned with.

Here's a three month rolling return chart for the three funds.
Over those three months the SEC yield of VUBFX went from 1.13% to 0.7% and VBIRX went from 0.45% to 0.32%.

Based on the SEC yield 3 months ago, might have expected about 0.28% from VUBFX, instead it had total return of 0.39%. So the extra gain due to lower interest rates was 0.11%. With it now at 0.7%, might expect 0.175% over the next 3 months and were there to be an equal excess gain of 0.11% then the total return would be about 0.29%. So even that optimistic outlook ends up with a total return that is not much better than the highest yielding savings accounts. And to get that would it require the SEC yield falling by at least as much as in the previous 3 months? If so, it would have to go down to 0.27%.

For VBIRX based on the SEC yield, might have expected 0.11%, instead it had a total return of 0.23%. In this case the 0.23% is about what you could have gotten from the highest yielding savings accounts.

While I would go with a savings account, if I were limiting myself to choosing between these two funds, I would go with VUBFX. I don't think there is all that much risk, over periods of more than a few months, in those ultrashort, mostly investment grade bonds it holds, particularly with the Fed still (I think) having the authority to buy them.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

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I have chosen for my two short-term funds VBIRX with a SEC yield of 0.33% and YTD return of 4.34% and Short Term Federal, VSGDX, ( I am ignoring the convexity issue) with a SEC yield of 1.0% and YTD return of 4%. Looking forward, which would one expect a higher return from with such a big difference in the SEC yield but nearly similar current YTD returns? In other words, how important is the SEC yield in such situations? If this is digressing from the thread, I apologize.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

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Munir wrote: Fri Oct 09, 2020 11:19 am I have chosen for my two short-term funds VBIRX [Short-Term Bond Index] with a SEC yield of 0.33% and YTD return of 4.34% and Short Term Federal, VSGDX, ( I am ignoring the convexity issue) with a SEC yield of 1.0% and YTD return of 4%. Looking forward, which would one expect a higher return from with such a big difference in the SEC yield but nearly similar current YTD returns? In other words, how important is the SEC yield in such situations? If this is digressing from the thread, I apologize.
The YTD return is irrelevant here; it is determined by past changes in bond yields (equivalently, in bond prices).

Consider two bonds, both with a 2% yield to maturity now, but Bond A had a 2% yield to maturity last year while Bond B had a 3% yield to maturity. The market value of Bond A didn't change over the last year, while the market value of Bond B rose (which is what causes the yield to maturity to decline). But if you hold both Bond A and Bond B to maturity, you will get the same 2% return on both.

Short-Term Bond Index is mostly Treasuries with 1/3 corporate bonds, while Short-Term Federal has a lot of agency bonds (FNMA, for example). Treasury yields dropped earlier this year, while agency bond yield didn't change much. The two funds might perform differently depending on what happens to different parts of the bond market, but there is no reason to expect either one to outperform in the future.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

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jeffyscott wrote: Fri Oct 09, 2020 9:42 am Over those three months the SEC yield of VUBFX went from 1.13% to 0.7% and VBIRX went from 0.45% to 0.32%.
You lost me. "Over those three months ... "

There are ~60 three month periods in the five year chart I presented. Are you making your observation on only the last one?
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by Electron »

Doc wrote: Thu Oct 08, 2020 2:22 pmAnd it's the going forward from today's artificially low rates that I'm concerned with.
A Fed rate hike at some point would definitely have an impact on these funds and the bond market may discount a higher Fed funds rate in advance.

One thing we can do is look at past tightening cycles that followed periods of low rates and see how the funds performed. Two periods of interest would be December 2015 and June 2004. There was also a small increase in the Federal Reserve discount rate in 2011.

https://en.wikipedia.org/wiki/History_o ... ee_actions
Munir wrote: Fri Oct 09, 2020 11:19 amI have chosen for my two short-term funds VBIRX with a SEC yield of 0.33% and YTD return of 4.34% and Short Term Federal, VSGDX, ( I am ignoring the convexity issue) with a SEC yield of 1.0% and YTD return of 4%. Looking forward, which would one expect a higher return from with such a big difference in the SEC yield but nearly similar current YTD returns? In other words, how important is the SEC yield in such situations?
The current SEC yield is probably the best predictor of near term returns that is available assuming no change in interest rates. Note that the SEC yield is likely to continue to change as bonds mature and are replaced.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

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Electron wrote: Fri Oct 09, 2020 1:54 pm A Fed rate hike at some point would definitely have an impact on these funds and the bond market may discount a higher Fed funds rate in advance.

One thing we can do is look at past tightening cycles that followed periods of low rates and see how the funds performed. Two periods of interest would be December 2015 and June 2004.
That's kind of thing I was trying to get out with the Vanguard Ultra Short fund. But it's only been around for five years.

Somehow a 1-5 corporate and/or Federal fund got substituted into this discussion,

Can you please revise your remarks.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

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Doc wrote: Fri Oct 09, 2020 1:36 pm
jeffyscott wrote: Fri Oct 09, 2020 9:42 am Over those three months the SEC yield of VUBFX went from 1.13% to 0.7% and VBIRX went from 0.45% to 0.32%.
You lost me. "Over those three months ... "

There are ~60 three month periods in the five year chart I presented. Are you making your observation on only the last one?
Yes, I was looking at the most recent 3 months.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by Electron »

Doc wrote: Fri Oct 09, 2020 2:18 pmThat's the kind of thing I was trying to get out with the Vanguard Ultra Short fund. But it's only been around for five years.
DFA has an ultra-short fund with a history going back to 1983. The symbol is DFIHX. Maybe this fund will provide some clues.

Here is a Morningstar chart showing DFIHX and VBIRX in 2008-2009.

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

The next chart shows DFIHX and VBIRX in 2015 to see the effect of the rate hike in mid December.

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

The last chart shows DFIHX and VBIRX in 2004 to see the effect of the June rate hike.

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D
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Re: Vanguard Ultra Short vs Short-Term Bond Index

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Electron wrote: Fri Oct 09, 2020 1:54 pm The current SEC yield is probably the best predictor of near term returns that is available assuming no change in interest rates.
I would say that the distribution yield is a better predictor of near-term returns assuming no change in yields (to maturity). With no change in yields, there are no changes in prices (assuming constant duration), and all return comes from distributions. Well, maybe a little return from rolldown return, but that is not captured in SEC yield.
Electron wrote: Fri Oct 09, 2020 1:54 pm Note that the SEC yield is likely to continue to change as bonds mature and are replaced.
Why? Again, assuming approximately constant fund duration, and no change in yields (to maturity), the average yield of the fund won't change much (basically a tautology), and thus SEC yield won't change much.

For conceptual purposes, say a bond fund is an equally-weighted monthly ladder, with the longest maturity 3 years and the shortest maturity 1 month. One month later, the 1-month bond matures and is replaced with a new 3-year bond. If there are no changes in yields, the new 3-year bond will have the same yield as the old 3-year bond (which is now a 2y11m bond). It might have a different coupon rate, so the distribution yield might change, but the yield to maturity, and thus the SEC yield, would not change.

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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by grabiner »

Kevin M wrote: Fri Oct 09, 2020 5:47 pm
Electron wrote: Fri Oct 09, 2020 1:54 pm The current SEC yield is probably the best predictor of near term returns that is available assuming no change in interest rates.
I would say that the distribution yield is a better predictor of near-term returns assuming no change in yields (to maturity). With no change in yields, there are no changes in prices (assuming constant duration), and all return comes from distributions. Well, maybe a little return from rolldown return, but that is not captured in SEC yield.
This is not correct. If a fund has a distribution yield higher than its SEC yield, this implies that the bonds in the fund will lose value over time even if their yields don't change.

SEC Yield on the wiki has an illustration. There are two bonds with different distribution yields but the same SEC yield. If rates don't change, both bonds have the same return. If rates fall or rise by the same amount, both bonds have almost the same return; the reason returns are not exactly equal is that the bond with higher distributions has a shorter duration.
Electron wrote: Fri Oct 09, 2020 1:54 pm Note that the SEC yield is likely to continue to change as bonds mature and are replaced.
Why? Again, assuming approximately constant fund duration, and no change in yields (to maturity), the average yield of the fund won't change much (basically a tautology), and thus SEC yield won't change much.
And this is correct. If bond yields don't change, the SEC yield of a fund won't change. Consider, for example, a fund holding bonds maturing in 1-10 years. At the end of the year, it sells the matured bond to buy a new 10-year bond. The fund holds bonds maturing in 1-10 years, just as it did the previous year, so its SEC yield will not change if bond yields do not change.

Conversely, the SEC yield of a fund can change even if the fund doesn't change its holdings. When the price of a bond falls, the yield of the same bond rises.

(edited to fix quoting)
Last edited by grabiner on Tue Oct 13, 2020 12:07 am, edited 1 time in total.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by Kevin M »

grabiner wrote: Fri Oct 09, 2020 6:23 pm
Kevin M wrote: Fri Oct 09, 2020 5:47 pm
Electron wrote: Fri Oct 09, 2020 1:54 pm The current SEC yield is probably the best predictor of near term returns that is available assuming no change in interest rates.
I would say that the distribution yield is a better predictor of near-term returns assuming no change in yields (to maturity). With no change in yields, there are no changes in prices (assuming constant duration), and all return comes from distributions. Well, maybe a little return from rolldown return, but that is not captured in SEC yield.
This is not correct. If a fund has a distribution yield higher than its SEC yield, this implies that the bonds in the fund will lose value over time even if their yields don't change.
Note that we're discussing near-term returns, which I'm assuming means a few months at most.

Regardless, we need to specify more parameters to really say what would happen. For example, depending on the difference between yield and coupon, and the term to maturity, a premium bond can actually increase in value as it moves closer to maturity, due to the rolldown return effect. The longer the maturity and the steeper the yield curve, the larger the rolldown return, and the more this offsets the pull toward par effect.

For example, I just modeled a 10-year, constant-yield ladder using current Treasury yields, but assuming the coupon rate is twice the yield. Here are the stats:

Average YTM: 0.42%
Average coupon: 0.85%
Average current yield (roughly analogous to distribution yield): 0.82%
1-year return: 0.81%

So with these assumptions, the 1-year return is much closer to the current yield than to the YTM. In other words, the income return dominates the price return.

For all bonds with maturities of 4 years or more, the magnitude of the negative price return is a small fraction of the coupon return. Looking at the 10-year bond, for example.

Initial yield: 0.79%
Coupon: 1.58%
1-year price return: -0.01%
1-year total return: 1.57%

Of course the 1-year bond returns the YTM, but this is swamped by the rolldown return of the longer-maturity bonds.

Within the context of this thread, which is about short-term bonds, it could go either way depending on duration and yield curve steepness. For an ultra-short fund, I wouldn't expect there to be much if any rolldown return, so perhaps YTM would be a better predictor even for a few months. But I was responding to a comment that did not specify duration.

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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by Electron »

Thanks Kevin and David for the corrections and analysis.

On predicting future returns in short term bond funds, I first thought of John Bogle's model for long term government bonds. Initial yield could be used to estimate the return for the decade ahead. The model is described in Chapter 2 of Common Sense on Mutual Funds.

If the same concept has at least some value with short term bond funds, then maybe the SEC yield would be a reasonable predictor if the time period extends out to the average maturity of the portfolio. However, it does make sense that distribution yield might be a better predictor over shorter periods. In the current environment, some bond holdings would be trading at a premium and I believe that translates to some loss of NAV over time.

I'm not sure what I was thinking when I said that SEC yield would change as bonds matured and were replaced. I believe the distribution yield would decline in the current environment as higher coupon bonds are replaced in the portfolio.

I had also just looked at the SEC yield history on VUBFX (Ultra-Short-Term Bond) and VBIRX (Short Term Bond Index).

https://personal.vanguard.com/us/funds/ ... &year=#res

https://personal.vanguard.com/us/funds/ ... &year=#res

The decline in SEC yields this year in these funds is quite striking. The bond rally and decline in market interest rates has been driven by investor demand. The Fed Funds rate has been steady at 0%-0.25% since March 15.

Getting back to VUBFX, VBIRX, and the topic of this thread, it's unfortunate that many of the ultra-short-term funds have a very limited history. Here is a list of ultra-short-term funds that might provide some historical comparisons with VBIRX.

https://money.usnews.com/funds/mutual-f ... short-bond
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by Munir »

Electron wrote: Sun Oct 11, 2020 4:28 pm Thanks Kevin and David for the corrections and analysis.

On predicting future returns in short term bond funds, I first thought of John Bogle's model for long term government bonds. Initial yield could be used to estimate the return for the decade ahead. The model is described in Chapter 2 of Common Sense on Mutual Funds.

If the same concept has at least some value with short term bond funds, then maybe the SEC yield would be a reasonable predictor if the time period extends out to the average maturity of the portfolio. However, it does make sense that distribution yield might be a better predictor over shorter periods. In the current environment, some bond holdings would be trading at a premium and I believe that translates to some loss of NAV over time.

I'm not sure what I was thinking when I said that SEC yield would change as bonds matured and were replaced. I believe the distribution yield would decline in the current environment as higher coupon bonds are replaced in the portfolio.

I had also just looked at the SEC yield history on VUBFX (Ultra-Short-Term Bond) and VBIRX (Short Term Bond Index).

https://personal.vanguard.com/us/funds/ ... &year=#res

https://personal.vanguard.com/us/funds/ ... &year=#res

The decline in SEC yields this year in these funds is quite striking. The bond rally and decline in market interest rates has been driven by investor demand. The Fed Funds rate has been steady at 0%-0.25% since March 15.

Getting back to VUBFX, VBIRX, and the topic of this thread, it's unfortunate that many of the ultra-short-term funds have a very limited history. Here is a list of ultra-short-term funds that might provide some historical comparisons with VBIRX.

https://money.usnews.com/funds/mutual-f ... short-bond
Comparing Short Term Federal's (VSGDX) numbers to the other two funds, VBIRX and VUBFX, the VSGDX drop in 2020 was less that the other two in percent terms and the VSGDX SEC remains currently higher than their's are. Does this imply that VSGDX has a brighter short-term future?
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by Electron »

Munir wrote: Sun Oct 11, 2020 5:21 pmComparing Short Term Federal's (VSGDX) numbers to the other two funds, VBIRX and VUBFX, the VSGDX drop in 2020 was less that the other two in percent terms and the VSGDX SEC remains currently higher than their's are. Does this imply that VSGDX has a brighter short-term future?
I can't add much to grabiner's reply earlier in this thread. The higher SEC yield would in theory produce the highest return if the yield-to-maturity of the bonds in all portfolios remained unchanged.

In the short term, I noticed that VBIRX has a significantly higher distribution yield. In addition, the distribution yield has fallen quite a bit less in percentage terms compared with VSGDX.

https://investor.vanguard.com/mutual-fu ... ions/vbirx

https://investor.vanguard.com/mutual-fu ... ions/vsgdx

The decline in SEC yields and distribution yields this year has been surprising. The SEC yield on VBIRX has declined from 1.76% to 0.33%. Vanguard's Price History Search Tool can provide this information.

https://personal.vanguard.com/us/funds/ ... &year=#res

One thing you can do is check the short term performance in the coming months to see how things turned out.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by Kevin M »

I've done quite a bit of analysis on VUBFX (ultra-short) SEC yield, distribution yield, subsequent 1m, 3m and 1y returns, and price vs. SEC yield. I hope to share some of this if it would be of interest.

One thing I would say is that neither SEC yield nor distribution yield is a very good estimate of "near-term" returns (1m, 3m). Looking at 1-year returns, SEC yield is comparably bad at estimating returns over a period in the ballpark of duration as for other longer-term funds I've looked at over the years. Finally, SEC yield and price don't have the same relationship as for an individual bond, say a constant-maturity bond, which is another thing I've observed and posted about in the past.

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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by grabiner »

Kevin M wrote: Wed Oct 14, 2020 8:15 pm One thing I would say is that neither SEC yield nor distribution yield is a very good estimate of "near-term" returns (1m, 3m). Looking at 1-year returns, SEC yield is comparably bad at estimating returns over a period in the ballpark of duration as for other longer-term funds I've looked at over the years. Finally, SEC yield and price don't have the same relationship as for an individual bond, say a constant-maturity bond, which is another thing I've observed and posted about in the past.
SEC yield will match returns (except for roll effects) over a time period equal to the duration if yields don't change, or if they change at the start of the period. If a fund holding one-year bonds has a 1% SEC yield, and yields rise to 2% tomorrow, the fund will lose 1%, but gain 2% in the next year for a total 1% one-year return. But if the yield rises to 2% at a constant rate over the entire year, your average yield for the year is only 1.5%, so your total return will be 0.5%. The same effect would occur for changes over five years in an intermediate-term fund with a five-year duration; if yields rise by 1% at a constant rate over the five-year period, the annualized five-year return would be 0.5% less than expected from the yield.

In addition, for any fund vulnerable to defaults and downgrades, there can be losses independent of the yield. If 10% of the bonds in a fund are downgraded and sold for 90% of their previous value, then replaced by other bonds with the same yield, the fund will lose 1% with no change in SEC yield.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by Northern Flicker »

Doc wrote: Wed Oct 07, 2020 4:30 pm Vanguard Ultra Short has been around now for a little over five years. I wondered how it was doing.

"Product summary
The fund’s investment objective is to seek to provide current income while maintaining limited price volatility. The fund invests in a diversified portfolio of high-quality and, to a lesser extent, medium-quality fixed income securities"
https://investor.vanguard.com/mutual-fu ... view/vubfx

VUBFX: Ultra Short
VBIRX: Short-Term Index

Growth:

Image

Any thoughts?
Nothing mysterious there-- in 2020 so far, TERM has been more rewarded than CREDIT.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by Doc »

Northern Flicker wrote: Wed Oct 14, 2020 11:02 pm Nothing mysterious there-- in 2020 so far, TERM has been more rewarded than CREDIT.
In the most recent periods VFUSX BBB has outperformed VBIRX AA. Both with same term. Credit wins. When you add back the Ultra short fund VUBFX BBB (same credit but different term) into the mix it gets more complicated. With the longer term and higher credit VBIRX vs the Ultra short fund VUBFX credit and term cancel each other out. ???

3 month rolling return chart:
Image

But this is all based on 2020. Argh!
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by Northern Flicker »

Why would anyone invest in bonds with credit exposure if their expected return was not higher than duration-matched treasuries? This would lead to the price falling until the yield incorporated a risk premium investors considered adequate for taking the higher risk, offering a higher expected return.

But in a time of falling rates, term exposure typically is more rewarded than credit exposure, again nothing surprising.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by jeffyscott »

Northern Flicker wrote: Fri Oct 16, 2020 1:25 amWhy would anyone invest in bonds with credit exposure if their expected return was not higher than duration-matched treasuries?
Well, it's not even close in this comparison. The SEC yield of ultrashort is 0.68% (or 0.78%), with duration of 0.9 years. Treasury bill yields are 0.10-0.12%. To get a yield 0.68%, you'd have to go to somewhere between 7-10 year treasuries. Short-term index, of which about 1/3 does have credit risk, still has less than 1/2 the SEC yield of the ultrashort fund and about 3X the duration.

Of course, direct CDs or savings accounts are less convenient but as safe as treasuries and you can likely get a yield equal to or better than that of the ultrashort fund. Also risk free would be $10K or 20K in I-bonds, with a better yield than ultrashort, if you can hold for at least 1 year: https://tipswatch.com/2020/10/14/unique ... nvestment/
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Re: Vanguard Ultra Short vs Short-Term Bond Index

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jeffyscott wrote: Fri Oct 16, 2020 8:30 am Of course, direct CDs or savings accounts are less convenient but as safe as treasuries ...
Only true if you don't consider liquidity as part of the safety measure.

(I lost several thousand dollars while tax loss harvesting in March because I had to wait a day for the replacement purchase due to liquidity issues.)
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by Electron »

Kevin M wrote: Wed Oct 14, 2020 8:15 pmI've done quite a bit of analysis on VUBFX (ultra-short) SEC yield, distribution yield, subsequent 1m, 3m and 1y returns, and price vs. SEC yield. I hope to share some of this if it would be of interest.

One thing I would say is that neither SEC yield nor distribution yield is a very good estimate of "near-term" returns (1m, 3m).
I'd be interested whether the analysis is presented in this thread or as a new topic. Hopefully many others will be interested as well.

I just brought up your 2015 thread "Initial SEC yield and subsequent 5yr and 10yr returns" which ran for several years with 205 posts.

viewtopic.php?f=10&t=155923

It seems that interest rates and spreads are constantly changing and I assume that makes it difficult to predict bond fund returns with any accuracy.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by Northern Flicker »

jeffyscott wrote: Fri Oct 16, 2020 8:30 am
Northern Flicker wrote: Fri Oct 16, 2020 1:25 amWhy would anyone invest in bonds with credit exposure if their expected return was not higher than duration-matched treasuries?
Well, it's not even close in this comparison. The SEC yield of ultrashort is 0.68% (or 0.78%), with duration of 0.9 years. Treasury bill yields are 0.10-0.12%. To get a yield 0.68%, you'd have to go to somewhere between 7-10 year treasuries. Short-term index, of which about 1/3 does have credit risk, still has less than 1/2 the SEC yield of the ultrashort fund and about 3X the duration.

Of course, direct CDs or savings accounts are less convenient but as safe as treasuries and you can likely get a yield equal to or better than that of the ultrashort fund. Also risk free would be $10K or 20K in I-bonds, with a better yield than ultrashort, if you can hold for at least 1 year: https://tipswatch.com/2020/10/14/unique ... nvestment/
My point was that the behavior Doc was discussing was perfectly normal, ie normal for credit exposure to enhance bond return except when rates fall, when things are less predictable.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by Kevin M »

grabiner wrote: Wed Oct 14, 2020 10:59 pm
Kevin M wrote: Wed Oct 14, 2020 8:15 pm One thing I would say is that neither SEC yield nor distribution yield is a very good estimate of "near-term" returns (1m, 3m). Looking at 1-year returns, SEC yield is comparably bad at estimating returns over a period in the ballpark of duration as for other longer-term funds I've looked at over the years. Finally, SEC yield and price don't have the same relationship as for an individual bond, say a constant-maturity bond, which is another thing I've observed and posted about in the past.
SEC yield will match returns (except for roll effects) over a time period equal to the duration if yields don't change, or if they change at the start of the period.
This is kind of hard to test empirically, since yields do change over time. Also, you can't ignore roll-return effects, since they can be significant.
grabiner wrote: Wed Oct 14, 2020 10:59 pmIf a fund holding one-year bonds has a 1% SEC yield, and yields rise to 2% tomorrow, the fund will lose 1% <snip>
This is true for individual bonds, but is demonstrably false for funds. SEC yield is weird.

Code: Select all

Month           Reinvest        Price   SEC

Aug-2020	7/31/2020	10.07	0.97%
Sep-2020	8/31/2020	10.07	0.83%
Oct-2020	9/30/2020	10.07	0.70%
I realize that you referenced an increase in yield, and this shows a decrease in yield, but the principle is the same. A drop of 27 basis points in SEC yield over two month, but price the same at the end of each month.

I can show many more examples, but I thought I'd start with this. This is similar to what I've observed and posted about in the past.

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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by grabiner »

Kevin M wrote: Fri Oct 16, 2020 8:25 pm
grabiner wrote: Wed Oct 14, 2020 10:59 pmIf a fund holding one-year bonds has a 1% SEC yield, and yields rise to 2% tomorrow, the fund will lose 1% <snip>
This is true for individual bonds, but is demonstrably false for funds. SEC yield is weird.

Code: Select all

Month           Reinvest        Price   SEC

Aug-2020	7/31/2020	10.07	0.97%
Sep-2020	8/31/2020	10.07	0.83%
Oct-2020	9/30/2020	10.07	0.70%
I realize that you referenced an increase in yield, and this shows a decrease in yield, but the principle is the same. A drop of 27 basis points in SEC yield over two month, but price the same at the end of each month.
The change happened in total return, not in NAV. The July 31 yield of 0.97% at a share price of $10.07 would would be a return of $.0079 per share if yields didn't change. The August dividend was $.0096 per share because of bonds trading at a premium, so if yields hadn't changed, the share price would have dropped by $.0017. For a fund with a 0.9-year duration, the decline of SEC yield of 0.14% should result in a share price decline by 0.126%, which is $.0013. These two numbers are within rounding error of each other.

That said, there are several other reasons for short-term effects. One effect which does not show up in fund statistics is turnover, which can be an issue for an actively-managed bond fund; if a fund sells a bond yielding 1% and buys a bond yielding 2%, the SEC yield of the fund will rise even if bond yields don't change. And I have seen that SEC yield, which is a 30-day lagging number, is sometimes unreliable over the short term.

And I do agree that roll returns can be significant, although the roll effect is small on a fund with such a short duration. If the yield curve doesn't change, the one-year roll return is equal to the duration times the slope of the yield curve at the duration. A one-year bond fund would gain 0.2% from the roll over one year if the slope is 0.2%; this would not be noticeable in the monthly returns.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by jeffyscott »

grabiner wrote: Sat Oct 17, 2020 8:22 amAnd I do agree that roll returns can be significant, although the roll effect is small on a fund with such a short duration. If the yield curve doesn't change, the one-year roll return is equal to the duration times the slope of the yield curve at the duration. A one-year bond fund would gain 0.2% from the roll over one year if the slope is 0.2%; this would not be noticeable in the monthly returns.
Coincidentally :?: , the SEC yield of VUBFX was 2.16% on 9/20/19 and it's 1 year return as of 9/30/20 was 2.36%, exactly equal to the starting SEC yield plus 0.2%.
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Re: Vanguard Ultra Short vs Short-Term Bond Index

Post by Electron »

Vanguard also provides the Yield to Maturity for bond funds. In the case of VUBFX, it is currently 0.6% versus 0.68% for the SEC yield. Unfortunately, I don't believe the Yield to Maturity reflects expenses and historical data may not be available.

Vanguard has an interesting news item online entitled "Investment-grade corporate credit and the pandemic".

https://investornews.vanguard/investmen ... -pandemic/

"While most companies’ earnings, and by extension the companies’ creditworthiness, took a hit from lockdowns intended to contain the pandemic, some companies held up better than others. Successful companies generally were those that had been in sounder financial positions to begin with, were better able to adapt their operations to serve new customer needs, and/or could reduce costs in the face of reduced activity."

"Given their cautious stance going into the pandemic, Vanguard funds were able to take advantage of opportunities that arose in March and April, when bond valuations cheapened significantly even for sectors and companies best positioned to withstand the downturn."

"With initial credit market adjustments to the pandemic behind us, Vanguard’s credit analysts and traders expect to see further opportunities for active management to add value, including in sectors more affected by COVID-19."
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