Vanguard High Yield Bond Fund Bogleheads

8/11/2019 Vanguard High Yield Bond Fund Bogleheads

1/12

Page 1of 1

BogleheadsInvesting Advice Inspired by Jack Bogle

http://www.bogleheads.org/forum/

Vanguard High Yield Bond Fundhttp://www.bogleheads.org/forum/viewtopic.php?f=10&t=58401

Vanguard High Yield Bond Fundby markh

For awhile I've tried to understand the disdain some on the forum have for the high yield fund, frequently called "junk".

Yet when I look at annual returns for the past ten years, including the two equity dives we all know about, the fund's results arepretty remarkable.

Certainly not as smooth as short term treasury or investment grade, but only one very slightly negative total return year, and somepretty great return years.

I know that Vanguard's high yield fund is more conservative than most, that past performance is no guarantee of the future. I alsoknow that Vanguard's portfolio analysis tool is considered fairly flawed, but it congratulates me on my 20% (of bond holdings)

allocation to HY, stating that "your holdings in HY provide important diversification" (paraphrased).

The other 80% of my bond holdings are split between short term treasury, short term investment grade, TIPS, limited term tax

exempt, and CA IT tax exempt.

How do others feel about a 20% stake in HY?

thanksmark

by allancoleman

My present asset allocation , markh , in my Vanguard Roth account is 81% ( VFIJX ) , 18% ( VWEAX ) , and 1% ( VMMXX ) and I intend toincrease my asset allocation in High - Yield by buying more later this summer after I do more institute - to - institute transfers from

my personal company 401(k) to my Vanguard Roth account to be able to fund that increased purchase .

by DaveS

Posted: Sun Aug 01, 2010 9:35 pm



Bogleheads View topic - Vanguard High Yield Bond Fund http://www.bogleheads.org/forum/viewtopic.php?f=10&t=58401&view=print

1 of 12 3/22/2014 10:16 PM


2/12

Take a look at how it did in late 2008 early 2009. Just as equities were going to a very warm place in a hand basket, this bond funddid the same. Yes it came back, but the point is you want to hold bonds as a refuge in the storm, not as another fund that goes downwhen equities do. So I think the board is correct. Get the investment grade corporate fund, not the junk fund.

Also look closely at the NAV of the high yield fund over the years. You will observe it has slowly and steadily gone down. I used to

argue with Swedroe over this fund, but time has proven him to be correct. Dave

by SteveB3005

My view is there has been better returns with less stress in funds with higher quality bonds, I prefer to get my stress in equities.

$10,000 invested in July 2000 today is....

Vanguard Hi-Yield Corp....$17,289

Vanguard Total Bond.......$18,255Vanguard Interm Treas....$19,617Vanguard GNMA..............$18,621

by markh

Dave:

I have been looking at total return, nearly 40% in 2009. And with respect to total return, in the past decade it had only one neg year,-0.88.

I DO have 80% of the bond holdings in very highly rated securities.

Why does Vanguard itself advocate for the fund?

by tibbitts




SteveB3005 wrote:

My view is there has been better returns with less stress in funds with higher quality bonds, I prefer to get my stress in

equities.

$10,000 invested in July 2000 today is....


2 of 12 3/22/2014 10:16 PMl h d i i d i h i ld d d h // b l h d /f / i i h f i i


3/12

I think that would be somewhat the expected return given the equity-like behavior of at least some portion of HY, and the fact thatequities returned far less than bonds for the decade.

But if you estimate, for example, that HY counts 50% as equity and 50% bond, that's might not be a bad result. Substitute your ownnumbers, but the point is that you'd have to compare whether you would have been better off with almost any combination of anon-HY bond fund, and some amount of TSM equities. I'm just guessing but it seems like you'd have to equate, for example, the equity

portion of HY to small cap value or something, to get better results, and that seems to be a bit of a stretch.

Paul

A second lookby Taylor Larimore

Hi Mark:

Look again.

2002 Bear Market:

-22% S&P 500 Index Fund+08% Total Bond Market Index Fund

+02% Vanguard High Yield

2008 Bear Market:

-37% S&P 500 Index Fund+05% Total Bond Market Index Fund-21% Vanguard High Yield

Vanguard Hi-Yield Corp....$17,289

Vanguard Total Bond.......$18,255

Vanguard Interm Treas....$19,617

Vanguard GNMA..............$18,621


Yet when I look at annual returns for the past ten years, including the two equity dives we all know about, the (High-

Yield) fund's results are pretty remarkable.


3 of 12 3/22/2014 10:16 PM

B l h d Vi t i V d Hi h Yi ld B d F d htt // b l h d /f / i t i h ?f 10&t 58401& i i t


4/12

Past 10-years:+6.20% Total Bond Market

+5.63% Vanguard High Yield

Past returns are no guarantee of future returns.

by markh

My apologies:

I did miss 2008 returns.

I see now the volatility. Good thing I had 80% invested in high grade quality!!

At any rate, I'm going to keep my 20% stake in high yield.

Thanks Taylor!mark

by markh

I would add one last thought:

Since inception (1986 for Total Bond Market vs. 1978 for HY) HY has about a 2% annual return advantage. So if one were buying andholding for 30 to 50 years, as I am doing, it would seem at least acceptable to have a 20% stake in it.

The last decade has not been a great one for equities, which would explain the advantage of TBM over that time frame.

by Dale_G

In the interest of bond diversification, I have long held about 12% of my bonds in Vanguard High Yield VWEAX and T.Rowe Price PREMXemerging market debt - lately moved to Powershares PCY.

Vanguard's high yield behaves as if it were about 25% equity, by the way, not 50%. And that 25% behaves like those "value" equitiesthat were so beloved here only a few years ago.

I don't mind taking some risk on the bond side, otherwise I would only own treasury bills.





4 of 12 3/22/2014 10:16 PM

Bogleheads View topic Vanguard High Yield Bond Fund http://www bogleheads org/forum/viewtopic php?f=10&t=58401&view=print


5/12

$10,000 invested in PREMX in July 2000 would be worth $29,990 today. But those disdaining risk in bonds wouldn't be interested.

Dale

by Tuxx

This fund should be a core holding in a retirement account.

by Dale_G

To each his own. Frankly I prefer that the rate chasers and those who prefer to take their risks on the equity side totally avoid highyield funds. At the margin it enhances my dividend reinvested returns.

We'll see what the next ten years brings.

Dale

Comparing funds with different inception dates ?by Taylor Larimore

Hi Mark:

It is never acceptable to compare funds since inception with different inception dates. This is because you are comparing funds duringdifferent periods. It is apples to oranges.

Actually, I would be surprised if Hi-Yield did not have higher return than traditional bonds over long periods. Hi-Yield bonds have much

higher volatility and therefore higher expected return.

Posted: Mon Aug 02, 2010 12:00 am


This fund should be a core holding in a retirement account.


Since inception (1986 for Total Bond Market vs. 1978 for HY) HY has about a 2% annual return advantage.


5 of 12 3/22/2014 10:16 PM

Bogleheads View topic - Vanguard High Yield Bond Fund http://www bogleheads org/forum/viewtopic php?f=10&t=58401&view=print


6/12

Bond funds are for primarily for safety--not a fund that declines -21% when stocks are doing the same thing. If we want risk, I think itis better to do it with stocks which offer higher returns--especially after-tax returns.

byjimkinny

My understanding is that high yield bonds funds are highly correlated with stocks. If one wants to diversify away from high correlationassets, why hold two closely related assets? Why not just add more stocks? The point of diversifying one's asset allocation is to ownnon-correllated

assets and to view the portfolio returns as a whole, rebalancing when needed.

Jim

by bikeguyken

Hi Mark,

I've had 10% of my bond funds in High Yield for over 20 years and am very content with that. I treat Vanguard's HY as having a 25%equity characteristic and as such 'swag' my already conservative equity position from 30% to 28%. You, me and Dale_G are part of a

minority on this board but hey 'There are many roads to Dublin'.

Ken

by rwwoods

We are a retired couple and have 27% of our bond allocation in SPDR Lehman High Yield (JNK). In "All About Asset Allocation", Rick

Ferri recommends 21% be allocated by active retirees.

byjeffyscottBill Bernstein at: http://www.efficientfrontier.com/ef/401/junk.htm





Belief in the efficient market theory does not relieve one of the duty to estimate asset-class returns. Because of the

term structure of high-yield bonds, returns will tend to mean-revert more quickly, and more surely, than equity. Yes,

there is risk. But when their long-term expected returns start approaching 5% over Treasuries (as they did not so long

ago), it looks like a risk worth taking with a small corner of ones portfolio. One caveat: Because most of the return,

similar to REITs, accrues as ordinary income, junk bonds are appropriate only for tax-sheltered accounts.

Are we market timing? I suppose. Its the lesser of two evilsId rather violate the efficient market hypothesis than

Bogleheads View topic - Vanguard High Yield Bond Fund http://www.bogleheads.org/forum/viewtopic.php?f 10&t 58401&view print

6 of 12 3/22/2014 10:16 PM



7/12

Vanguard's high yield fund has an SEC yield of about 7.3%, the duration is 4.8 years. I am guessing the equivalent duration treasurywould be somewhere between 5 year and 7 year maturity, bonds of that maturity are currently yielding 1.6% and 2.3%, so spread is atleast 5% (and that despite the relatively conservative nature of the Vanguard high yield fund.

by Beagler

The utility of holding the high-yield bond fund might be for those who do not plan on liquidating shares but rather only takingdistributions. There is one poster on the Morningstar Income & Dividend Investing forum who makes extensive use of this fund; here-invests a portion of the yield for an increasing number of shares. As a matter of fact, he was asked to write an article about this

approach for morningstar dot com (August 21, 2009 Perspectives Archive).

by Dingle

Its easy to talk positve about a fund when its had a good run. Come back and tell us your thoughts on this fund after it hits the wall

and lags all other asset classes.

by nisiprius

How about calling them "not investment-grade?" Or "speculative?" Those are reasonably neutral. "High-yield" bonds makes them sound

extra-good, as if they were just regular bonds on steroids.

All risky assets have periods of time during which they have pretty remarkable returns. That's why people think the risk is worthtaking.

ignore appealing expected returns with a relatively short time horizon.




markh wrote:

For awhile I've tried to understand the disdain some on the forum have for the high yield fund, frequently called "junk".

Yet when I look at annual returns for the past ten years, including the two equity dives we all know about, the fund's

results are pretty remarkable.


Bogleheads View topic Vanguard High Yield Bond Fund http://www.bogleheads.org/forum/viewtopic.php?f 10&t 58401&view print

7 of 12 3/22/2014 10:16 PM


8/12



9/12

Edit to note Taylor offered a similar observation above.

Re: Comparing funds with different inception dates ?by ResNullius

I've got a substantial portion of our portfolio is either Vanguard investment grade or tax-exempt. I have bonds for one reason: safetyand relative stability. It these weren't important, then I would have 100% in equities. Buying junk is buying junk, because it ain't called

junk for nothing.

Re: A second lookby Bradley

[quote="Taylor Larimore"]2008 Bear Market:

-37% S&P 500 Index Fund

+05% Total Bond Market Index Fund-21% Vanguard High Yield


Taylor Larimore wrote:

Hi Mark:

It is never acceptable to compare funds since inception with different inception dates. This is because you are

comparing funds during different periods. It is apples to oranges.

Actually, I would be surprised if Hi-Yield did not have higher return than traditional bonds over long periods. Hi-Yield

bonds have much higher volatility and therefore higher expected return.

Bond funds are for primarily for safety--not a fund that declines -21% when stocks are doing the same thing. If we wantrisk, I think it is better to do it with stocks which offer higher returns--especially after-tax returns.

Since inception (1986 for Total Bond Market vs. 1978 for HY) HY has about a 2% annual return advantage.


g p g g p g g p p p p

9 of 12 3/22/2014 10:16 PM



10/12

Total Bond Index Fund return for 2008 was 5.05%

byjh

...

by markh

Taylor:

Rather than saying it is never acceptable to compare funds with different inception rates, I would say it is less than ideal, and thefurther apart the inception dates are, the less and less ideal.

I like Dr. Bernstein's analysis, as described in a post above, regarding the fund.

Nothing said here has changed my mind about my minority bond stake in the fund; in fact it has been reinforced that it is a good and

diversifying thing.

mark

byjms824

I like Mark's 20% allocation to Hi Yield Bond Funds. I also like Fidelity's FAGIX and I like JNK. And I do consider a portion of these

holdings as small cap equity holdings. I like the performance and dividends.jms

by wintermute

Posted: Mon Aug 02, 2010 1:16 pm




jh wrote:

It is pretty easy to guesstimate the real return on bond funds. For junk bonds you need to subtract off the expected

default rate and your inflation rate. The expected default on this fund is 1.5%. Assume inflation is 3%.

If the yield is 7% then you have:

7 - 1.5 - 3 = 2.5%

10 of 12 3/22/2014 10:16 PM



11/12

Comparing spreads using my own set of #s:

2010 inflation (usinflationcalculator.com): 1.1

5 year Treasuries (morningstar.com front page): 1.64Default rate: I'll use 3% (currently 1%) * 40% recovery = 1.2% loss

VWEHX yield: 7.27JNK yield: 10.8

VWEHX: 7.27 - 1.2 - 1.64 = 4.43% spread vs Treasuries

JNK: 10.8 - 1.2 - 1.64 = 7.96% spread vs Treasuries

Real yield:5 year Treasuries: .54VWEHX: 3.33JNK: 9.7

Interest rate risk seems to be the biggest factor to me, but the market seems to think it's credit risk (hence the big spread). Call risk I

have no idea on (haven't look at coupon rates vs yield). JNK has only 155 holdings, but at least they are liquid. It seems to track itsNAV pretty well (glancing at morningstar).

Re: Vanguard High Yield Bond Fundby TJAJ9

So, now you can simply compare this real yield to that of other bond funds. Let's say that intermediate treasuries have

a yield of 2%. So you have:

2 - 3 = -1%

So, ask yourself. Do you prefer a 2.5% real yield or a -1% real yield?

Posted: Tue Aug 03, 2010 4:12 am

markh wrote:For awhile I've tried to understand the disdain some on the forum have for the high yield fund, frequently called "junk".

11 of 12 3/22/2014 10:16 PM



12/12

All times are UTC - 5 hours [ DST ]Page 1of 1

They're called junk for a reason... I wouldn't touch them with a 10 foot pole. I prefer to take risk with equities. Bonds are for safety.

by Tuxx

TIPS, Treasuries, saving bonds, CDs, short term investment grade bonds and money markets are for safety.

High Yield Corporate's 7%+ yield on a Beta of .84% is great risk reward.

Powered by phpBB Forum Software phpBB Grouphttp://www.phpbb.com/

Yet when I look at annual returns for the past ten years, including the two equity dives we all know about, the fund's

results are pretty remarkable.

Certainly not as smooth as short term treasury or investment grade, but only one very slightly negative total return

year, and some pretty great return years.

I know that Vanguard's high yield fund is more conservative than most, that past performance is no guarantee of the

future. I also know that Vanguard's portfolio analysis tool is considered fairly flawed, but it congratulates me on my 20%

(of bond holdings) allocation to HY, stating that "your holdings in HY provide important diversification" (paraphrased).

The other 80% of my bond holdings are split between short term treasury, short term investment grade, TIPS, limited

term tax exempt, and CA IT tax exempt.


thanks

mark

Posted: Tue Aug 03, 2010 4:26 am

12 of 12 3/22/2014 10:16 PM

Vanguard High Yield Bond Fund Bogleheads

Documents

Transcript of Vanguard High Yield Bond Fund Bogleheads