Vanguard Launches Investment-Grade Corporate Bond ETF Of ETF

Vanguard has launched a new fixed-income fund focused on providing exposure to the investment-grade corporate bond space. It has a unique structure, as it invests in other ETFs.

Vanguard Total Corporate Bond ETF (BO:VTC) tracks the Bloomberg Barclays (LON:BARC) U.S. Corporate Bond Index.

Fund Characteristics

The fund seeks to provide exposure to U.S. dollar-denominated, investment-grade corporate bonds with an intermediate aggregate duration. It has AUM of $19 million and seeks to provide cheap exposure to the highly rated corporate bond space. It charges 7 basis points as fee per year and holds three other ETFs in its portfolio. It bears less concentration risk as all its holding ETFs are well diversified among themselves.

The fund invests in Vanguard Short-Term Corporate Bond ETF VCSH, Vanguard Intermediate-Term Corporate Bond ETF VCIT and Vanguard Long-Term Corporate Bond ETF VCLT.

From a sector look, corporate bonds take the majority as 99% of the assets are allocated to them, while 1% is allocated to cash.

From a credit-rating perspective, the fund has 57.0% exposure to BBB rated bonds, 32.0% to A rated bonds, 6.0% to AA rated bonds, 3.0% to BB rated bonds, 1.0% to AAA rated bonds and 1.0% to Cash. Therefore, due to its investment-grade focus, the fund bears negligible default risk.

Moreover, markets anticipate an interest rate hike in the December meeting of the Fed. Per the CME Fed Watch tool, there is a 91.5% chance of a 25 basis point rate hike and 8.5% chance of a 50 basis point rate hike in December. This fund is expected to be significantly impacted because of its aggregate intermediate-term focus. However, it reduces exposure to interest rate changes to a certain extent by investing some of the assets into short-term bonds. A shade less than 40% of the assets are allocated to bonds with a maturity of less than five years.

Competition

Although there are not many ETF of ETF-structured funds in the corporate bond space, the fund faces a lot of competition from other investment-grade corporate bond funds. Below we discuss a few ETFs that seek to provide exposure to this corner (see all Investment Grade Corporate Bond ETFs here).

iShares iBoxx $ Investment Grade Corporate Bond ETF LQD

This fund has AUM of $38.8 billion and seeks to provide exposure to investment-grade corporate bonds. It charges 15 basis points in fee per year and holds 1864 bonds in its portfolio. From a sector look, Banking, Consumer Non-Cyclical and Communications are the top three allocations of this fund, with 28.0%, 17.5% and 12.0% exposure, respectively (as of Nov 15, 2017). The fund targets the intermediate end of the yield curve as it has a weighted average maturity of 12.41 years and an effective duration of 8.41 years. The fund has returned 2.7% year to date and 1.9% in a year (as of Nov 16, 2017).

SPDR Portfolio Intermediate Term Corporate Bond ETF SPIB

This fund has AUM of $2.6 billion and seeks to provide exposure to investment-grade corporate bonds. It charges 7 basis points in fee per year and holds 3544 bonds in its portfolio. From a sector look, Industrial, Finance and Utility are the top three allocations of this fund, with 58.3%, 37.5% and 4.7% exposure, respectively (as of Nov 15, 2017). The fund targets the short to intermediate end of the yield curve as it has an average maturity of 5.02 years and option-adjusted duration of 4.45 years. The fund has returned 1.2% year to date and 0.1% in a year (as of Nov 16, 2017).

PIMCO Investment Grade Corporate Bond Index Exchange-Traded Fund CORP

This fund has AUM of $826.6 million and seeks to provide exposure to investment-grade corporate bonds. It charges 20 basis points in fee per year and holds 443 bonds in its portfolio. From a sector look, Investment Grade Credit, Emerging Markets and Net Other Short Duration Instruments are the top three allocations of this fund, with 92.5%, 5.1% and 3.5% exposure, respectively (as of Oct 31, 2017). The fund targets the intermediate end of the yield curve as it has an effective maturity of 10.17 years and effective duration of 6.97 years. The fund has returned 2.7% year to date and 2.0% in a year (as of Nov 16, 2017).

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