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Bogleheads
Investing Advice Inspired by Jack Bogle
http://www.bogleheads.org/forum/
Vanguard High Yield Bond Fund
http://www.bogleheads.org/forum/viewtopic.php?f=10&t=58401
Vanguard High Yield Bond Fund
by 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 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.
How do others feel about a 20% stake in HY?
thanks
mark
by allancoleman
My present asset allocation , markh , in my Vanguard Roth account is 81% ( VFIJX ) , 18% ( VWEAX ) , and 1% ( VMMXX ) and I intend to
increase 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
Posted: Sun Aug 01, 2010 10:01 pm
Posted: Sun Aug 01, 2010 10:25 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
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 fund
did 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 down
when 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.......$18,255
Vanguard Interm Treas....$19,617
Vanguard 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
Posted: Sun Aug 01, 2010 10:32 pm
Posted: Sun Aug 01, 2010 10:38 pm
Posted: Sun Aug 01, 2010 10:49 pm
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....
Bogleheads View topic - Vanguard High Yield Bond Fund http://www.bogleheads.org/forum/viewtopic.php?f=10&t=58401&view=print
2 of 12 3/22/2014 10:16 PM
I think that would be somewhat the expected return given the equity-like behavior of at least some portion of HY, and the fact that
equities 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 own
numbers, but the point is that you'd have to compare whether you would have been better off with almost any combination of a
non-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 look
by 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
Posted: Sun Aug 01, 2010 10:51 pm
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.
Bogleheads View topic - Vanguard High Yield Bond Fund http://www.bogleheads.org/forum/viewtopic.php?f=10&t=58401&view=print
3 of 12 3/22/2014 10:16 PM
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 and
holding 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 PREMX
emerging 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" equities
that 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.
Posted: Sun Aug 01, 2010 11:02 pm
Posted: Sun Aug 01, 2010 11:19 pm
Posted: Sun Aug 01, 2010 11:19 pm
Bogleheads View topic - Vanguard High Yield Bond Fund http://www.bogleheads.org/forum/viewtopic.php?f=10&t=58401&view=print
4 of 12 3/22/2014 10:16 PM
$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 high
yield 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 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.
Posted: Mon Aug 02, 2010 12:00 am
Posted: Mon Aug 02, 2010 12:24 am
This fund should be a core holding in a retirement account.
Posted: Mon Aug 02, 2010 7:22 am
Since inception (1986 for Total Bond Market vs. 1978 for HY) HY has about a 2% annual return advantage.
Bogleheads View topic - Vanguard High Yield Bond Fund http://www.bogleheads.org/forum/viewtopic.php?f=10&t=58401&view=print
5 of 12 3/22/2014 10:16 PM
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 it
is better to do it with stocks which offer higher returns--especially after-tax returns.
by jimkinny
My understanding is that high yield bonds funds are highly correlated with stocks. If one wants to diversify away from high correlation
assets, why hold two closely related assets? Why not just add more stocks? The point of diversifying one's asset allocation is to own
non-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.
by jeffyscott
Bill Bernstein at: http://www.efficientfrontier.com/ef/401/junk.htm
Posted: Mon Aug 02, 2010 7:23 am
Posted: Mon Aug 02, 2010 7:51 am
Posted: Mon Aug 02, 2010 7:56 am
Posted: Mon Aug 02, 2010 9:47 am
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
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 treasury
would be somewhere between 5 year and 7 year maturity, bonds of that maturity are currently yielding 1.6% and 2.3%, so spread is at
least 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 taking
distributions. There is one poster on the Morningstar Income & Dividend Investing forum who makes extensive use of this fund; he
re-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 worth
taking.
ignore appealing expected returns with a relatively short time horizon.
Posted: Mon Aug 02, 2010 10:25 am
Posted: Mon Aug 02, 2010 10:26 am
Posted: Mon Aug 02, 2010 10:28 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".
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.
How do others feel about a 20% stake in HY?
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
Fidelity Freedom 2045 (their target-date series) is 5.39% investment grade bonds, 10.53% "high yield" bonds. That is, 2/3 of their
"bond" allocation is high yield! By the time they get out to Freedom 2015, they have 29.81% investment grade, 6.06% TIPS, 5.27% high
yield, so 1/8 of their "bonds" are "high yield."
So having 20% of your bonds be not investment-grade would seem enthusiastic but well within the range of the sane.
The main thing is not to kid yourself about the risk. There was a discussion about this a while back and no agreement was reached,
but I personally feel that you are kidding yourself about your asset allocation if you include high-yield bonds as part of your "bond"
allocation. (The debate was whether it made sense to consider high-yield as if it were, say, half stocks and half bonds. Nobody really
liked this, it's too arbitrary and because the fans of non-investment-grade bonds say the whole point is that it does not behave the
same as a mix of stocks and investment-grade bonds.
Vanguard has no non-investment-grade bonds in its Target Retirement series, non, zero, zip, nada. Me, I was holding Fidelity Freedom
2010 in my 401(k) when I got a letter from them, notifying me of a rule change that would allow the fund to increase its allocation to
"high-yield" bonds, and I took that as my cue to get out of the fund, so you know what I think.
My personal feeling is that I find plain old stocks, bonds, and even cash quite hard to understand and that it is a mistake for me to be
always tweaking and changing by "diversifying" into asset classes that I understand even less. I don't exactly disdain non-investment-
grade, I just don't believe they can do much harm or much good. If I were a serious bond expert with a fairly deep understanding of
junk bonds, I might conceivably decide they do a little good, but that would have to come out of my own knowledge, not someone
else's at second or third hand.
If, for whatever reason, you've decided to hold 20% of your bond allocation as "high-yield," that sounds like a reasonable enough thing.
And so is 0% high-yield, which is my choice (and Vanguard's, in their target-date funds) Don't believe anyone who is sure they know
which is better. Having made your decision, you should stick with it unless there's compelling evidence that it's some big awful
mistake, and there isn't any, not when it's only 20% of your bond allocation.
by dbr
A very conventional Boglehead view would be that if you want a portfolio with greater expected return at higher risk you can tilt your
equity allocation more to small cap value.
If one wants to consider high yield bonds the discussion is really not about high yield bonds but about what are the optimum methods
to increase portfolio return and at what consequences for overall risk.
I fear that too many discussions about bonds are just discussions about bonds when the discussion should be about portfolios that
include bonds, which virtually all portfolios do.
Posted: Mon Aug 02, 2010 10:51 am
Bogleheads View topic - Vanguard High Yield Bond Fund http://www.bogleheads.org/forum/viewtopic.php?f=10&t=58401&view=print
8 of 12 3/22/2014 10:16 PM
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: safety
and 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 look
by Bradley
[quote="Taylor Larimore"]
2008 Bear Market:
-37% S&P 500 Index Fund
+05% Total Bond Market Index Fund
-21% Vanguard High Yield
Posted: Mon Aug 02, 2010 10:55 am
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 want
risk, 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.
Posted: Mon Aug 02, 2010 11:19 am
Bogleheads View topic - Vanguard High Yield Bond Fund http://www.bogleheads.org/forum/viewtopic.php?f=10&t=58401&view=print
9 of 12 3/22/2014 10:16 PM
Total Bond Index Fund return for 2008 was 5.05%
by jh
...
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 the
further 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
by jms824
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
Posted: Mon Aug 02, 2010 6:41 pm
Posted: Mon Aug 02, 2010 9:20 pm
Posted: Mon Aug 02, 2010 10:33 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%
Bogleheads View topic - Vanguard High Yield Bond Fund http://www.bogleheads.org/forum/viewtopic.php?f=10&t=58401&view=print
10 of 12 3/22/2014 10:16 PM
Comparing spreads using my own set of #s:
2010 inflation (usinflationcalculator.com): 1.1
5 year Treasuries (morningstar.com front page): 1.64
Default rate: I'll use 3% (currently 1%) * 40% recovery = 1.2% loss
VWEHX yield: 7.27
JNK 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: .54
VWEHX: 3.33
JNK: 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 its
NAV pretty well (glancing at morningstar).
Re: Vanguard High Yield Bond Fund
by 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".
Bogleheads View topic - Vanguard High Yield Bond Fund http://www.bogleheads.org/forum/viewtopic.php?f=10&t=58401&view=print
11 of 12 3/22/2014 10:16 PM
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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.
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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.
How do others feel about a 20% stake in HY?
thanks
mark
Posted: Tue Aug 03, 2010 4:26 am
Bogleheads View topic - Vanguard High Yield Bond Fund http://www.bogleheads.org/forum/viewtopic.php?f=10&t=58401&view=print
12 of 12 3/22/2014 10:16 PM