Vanguard Plans Active Bond ETF Hello, this is Jeff DeMaso with the FFSA Vanguard Hotline for Thursday, January 21st. There are no changes recommended for any of our Model Portfolios. Yesterday, Joe Biden was sworn in as our 46th President, and the markets didn't crater. In fact, most of the major indexes in the U.S. closed at record highs. Clearly, the calls for a market crash if Biden became president were misguided—in much the same way that warnings of a market collapse four years ago if Trump won the election were wrong. As Dan and I said repeatedly throughout election season, don't mix politics and your investment decisions. Stocks tend to go up over time—regardless of who is in the White House. Thankfully, with all the noise coming out of Washington, it was a relatively quiet week in terms of economic data. Notably, retail sales have slumped the past few months as the pandemic has worsened. That said, retail sales are still higher than they were a year ago. Additionally, it's possible that we have seen the worst of the pandemic in terms of the numbers of new cases. It is too soon to say, but new cases have been trending lower in most states over the past week, and vaccine rollouts, while still disorganized, are about to get a lot more attention from the federal government. While it may have been a quiet week elsewhere, there was some big news out of Malvern. On Tuesday, Vanguard filed with the SEC to launch its first actively managed bond ETF in the form of Ultra-Short Bond ETF. Technically, the new ETF, which is due to launch in the second quarter, will be a separate entity from the existing Ultra-Short-Term Bond (VUBFX) mutual fund. This is a different structure from Vanguard's index ETFs, which are often just different share classes of the mutual funds. Still, given the same trio will be managing both the ETF and the mutual fund—and expenses are estimated to be the same between the ETF and the Admiral shares of the mutual fund—investors can expect substantially similar performance. Over the last five years, Ultra-Short-Term Bond has served investors well as a cash-plus option. It's been a place to earn more income in exchange for taking on a little more risk. The mutual fund's 10.1% return over the last five calendar years isn't anything to get excited about. But it is nearly double Federal Money Market's (VMFXX) 5.6% return and nearly matches Short-Term Treasury's (VFISX) 10.7% gain despite taking on only about half the interest-rate risk. 
Ultra-Short Bond ETF is entering a somewhat crowded space. PIMCO, BlackRock (iShares), Invesco, JP Morgan and Janus Henderson all manage active ultra-short bond ETFs with assets ranging from $3 billion to $15 billion or so. Vanguard pricing its Ultra-Short Bond ETF at 0.10% is on the low end, but not the lowest. BlackRock charges just 0.08% for their active option. Given it's an ultra-short-term bond fund, this is akin to Vanguard just dipping a toe in the pool. But it sets the stage for Vanguard to put other active funds in the ETF wrapper. I'd expect to see Core Bond ETF in short order if this goes well. Speaking of Ultra-Short-Term Bond and Core Bond (VCORX), Vanguard gave the managers of those portfolios a bit more flexibility when it comes to the quality of the securities they can buy. Previously, on both funds, the managers could only invest up to 30% of their portfolios in BBB-rated or "medium-quality" bonds. Vanguard did away with that 30% cap. Note that at Core Bond, the managers can still invest up to 5% of their portfolio in junk bonds. I don't think this change in quality limits is a big deal or anything to worry about. Loosening the restrictions reflects the makeup of the bond market where there are more bonds in lower-rated categories than in higher-rated ones. Nearly 28% of Ultra-Short-Term Bond's portfolio was in BBB-rated bonds at the end of the year. The change means the managers won't be forced to make investment decisions based on some arbitrary thresholds. Vanguard eased this quality constraint at Short-Term Investment-Grade (VFSTX) and Intermediate-Term Investment-Grade (VFICX) last year. Why are Ultra-Short-Term Bond and Core Bond only catching up now? I can't say for sure, but this may be just another example of the difficulty a shop like Vanguard has in managing a sprawling lineup of funds and ETFs. Speaking of difficulty… here we go again. Vanguard has been sending out 1099-DIV tax forms purporting to show all dividends paid out by Vanguard funds in 2020, except they apparently are missing some. This is just one more Vanguard systems error that is going to cause consternation among shareholders, will cause Vanguard's phones to light up and create a backlog, and add to the distrust that investors will have over whether the information Vanguard provides is accurate or not. And when you're dealing with the IRS, I doubt it's a viable excuse to blame someone else, even if it is Vanguard. Our Model Portfolios are off to a good start to the year, largely thanks to the PRIMECAP Management team and Baillie Gifford. Capital Opportunity (VHCOX) is up 8.0% on the year through Wednesday, and International Growth (VWIGX), this year's Hot Hands fund, is up 8.1%. Of course, not every fund has gotten out of the blocks well. Dividend Growth (VDIGX) is down 0.5% so far this year as consumer stocks—like Coke, Pepsi, Procter & Gamble and Colgate-Palmolive—have stumbled. But, put it all together, and as I said, our Model Portfolios have gotten off on the right foot. The Growth Model is up 5.0%, the Growth Index Model is up 2.9%, the Conservative Growth Model is up 4.0% and finally the Income Model is up 2.2%. This compares to a 3.5% gain for Total Stock Market Index (VTSAX), a 4.6% return for Total International Stock Index (VTIAX) and a 0.7% drop for Total Bond Market Index (VBTLX). Vanguard's most aggressive multi-index fund, Target Retirement 2065 (VLXVX), is up 3.5% for the year, and its most conservative, Target Retirement Income (VTINX), is up 1.0% for the year. Until next week, this is Jeff DeMaso wishing you a safe, sound and prosperous investment future.  Like Dan and Jeff on Facebook
| 
Comments
Post a Comment