Vanguard Adds Long-Overdue Junk Bond ETF at Tricky Time
The company filled a hole in its fixed-income ETF line — but the timing may not be ideal, given relatively low yields in junk bonds relative to Treasurys, one observer said.
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Need an active, fixed-income ETF? Vanguard just checked both boxes.
The firm launched the High-Yield Active ETF (VGHY) today in its latest push into actively managed bond products. CEO Salim Ramji has prioritized the expansion and said last year that Vanguard was in a prime position to make its mark on a segment that he called antiquated and expensive. The new ETF is not a copy of Vanguard’s $25 billion High-Yield Corporate Fund, a mutual fund, but the ETF has broader coverage for credit quality, going as low as CCC (the mutual fund is focused on BB and B).
“Both products will be well-supported, and investors will have the choice across our lineup,” said Rebecca Venter, senior fixed income product manager at Vanguard. “We’ve also seen over time that the high-yield corporate bond market has shifted quite dramatically since the Great Financial Crisis.”
Quality Control
The traditional high-yield credit market has moved up in quality as a result of more lower-quality issuance in the bank loan and private credit markets, Venter said. Today, BB-rated debt accounts for over half of the high-yield market, she noted. Here’s how VGHY compares to the mutual fund:
- Fees for the new ETF are 0.22%, matching those of the High-Yield Corporate Fund’s Investor Shares, but higher than that fund’s 0.12% charged by the Admiral Shares.
- VGHY’s portfolio manager is Michael Chang, who also manages the High-Yield Corporate Fund along with Wellington Management’s Elizabeth Shortsleeve.
The fund, the ninth in Vanguard’s line of active bond ETFs, follows numerous other fixed income launches this year. In July, for example, the firm added three Treasury ETFs, following its addition of the Multisector Income Bond ETF in April. The company also rolled out two fixed income model portfolio options the same month.
Junk Sale: It’s about time that Vanguard had a high-yield ETF, but the surprise in this launch is that the fund is actively managed, said Jeff DeMaso, editor of The Independent Vanguard Adviser. In an analysis he published today, DeMaso rated the ETF as a “buy,” but he also discouraged people from buying it, at least for a while. The reason for that? Spreads are tight, he said, with yields on corporate junk bonds being about 2 percentage points higher than yields on intermediate-term Treasurys, which is significantly below the long-term average of over 3.5 percentage points.
“It’s about time Vanguard filled this gap,” DeMaso said. “But the launch comes at the wrong time. For now, patience — not bold moves — is the smarter play.”
