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Summary High-yield bond fund that has shown good returns over the last decade. Junk bonds are in the top end of credit quality. Option to help with reducing risk and volatility in a portfolio. Mutual funds are a great way to improve risk adjusted returns for investors. There are many options when looking for high yield investments and recently I have been looking at high-yield bond funds. Vanguard High-Yield Corporate Fund Investor Shares (MUTF: VWEHX ) holds high rated “junk bonds” and aims for investors who are looking for consistent income. Since inception in 1978 the fund has had an average annual return of 8.48%. With how well the bonds are chosen and a high yield, this fund has the potential to fit into many portfolios. While it may not beat the market in overall return, there is going to be less risk and volatility to worry about. Expense Ratio The expense ratio is .23% for the minimum investment. This is a surprisingly low expense ratio for an actively managed fund seeking high-yield bonds. There is a minimum investment of $3,000 to invest in this mutual fund. The Lipper peer average expense ratio was 1.11% as of 12/31/2014. The management team had a turnover rate of 34.7% the last fiscal year and has performed well compared to similar funds. Yield VWEHX has a distribution yield of 5.58%, which is great for more current income in a portfolio. The combination of a high yield and a low expense ratio make this fund a definite option. While this fund is correlated on a short term basis to stocks, the high yield needs to be taken into consideration. During an extended down period for the market this high yield is going to greatly reduce the overall loss. However, when we are in a bull market a bond fund is not going to see a lot of growth. Here’s a comparison to the S&P: Even though you can definitely see the correlation, there is a massive difference in volatility. Over a long period of time VWEHX has performed very well on a returns basis because of the high yield. Because of how this fund functions, I wouldn’t have it in my portfolio unless I had a good utilization for the yield. Diversification Here’s a graph showing bond sector allocation: Along with 402 holdings, VWEHX has broad diversification. All the different sector and company exposure is a good first step in protecting against risk. Among the 402 holdings, there is a good balance of diversity without investing too much in a few companies. There is only one holding with over 1% and quickly shifts to the tenth being at .80%: On top of being well diversified, the management has shown over decades their process to choose bonds has worked. The fund uses a fundamental process when looking at credit quality. With how the bonds are chosen there is generally a higher credit quality and less volatility than competitors. The average annual returns over the past ten years has been 6.56% and over five years has been 6.33%. This has been a top performing high yield bond fund since its inception and continues to perform. I normally wouldn’t pay attention to one-year periods, but it makes a point of how this fund does during a bump. Over the last year the fund has had an annual return of .91%, which is in the top 10% for funds in this category. VWEHX’s high yield has saved the day again here. An interesting point to look at this fund is the yield and performance while selecting high-quality junk bonds as shown in the following chart: 90% of the holdings are B3 or above. Management has stated that they will never have more than 10% of the holdings below B quality. Over 85% is in the top end of non-investment grade bonds. There has been some speculation as to how management finds bonds, which can be found here . Whatever exact strategy is used, Wellington Management has done a good job choosing investments for this mutual fund. Conclusion VWEHX is broadly diversified and has had a high sustainable current income. VWEHX has higher credit quality bonds compared to the others junk bond funds. Management has used a credit selection process, which has shown a lower return volatility compared to competitors. High-yield bond funds will have a correlation to the market, but the lower risk and high income coming in from a high yield will get rid of massive bumps in volatility. I would want this fund around 5%-10% of my heavily indexed portfolio to help with income and reduce overall volatility. Scalper1 News
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