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By its standards, Vanguard it’s been active in terms of bringing new exchange traded funds (ETFs) to market this year. With the recent debut of the ETF to be discussed, the index fund giant has brought three new ETFs to market in less than two months.
The newest addition is the Vanguard U.S. High-Yield Corporate Bond Index ETF (CBOE: VCHY), which debuted on June 4. VCHY represents an expansion of the issuer’s junk bond ETF roster which didn’t exist until the actively managed Vanguard High-Yield Active ETF (VGHY) launched last September. For advisors seeking a little more income for clients without the need to stretch into the often adventurous world of private credit, VCHY may be a well-timed infant ETF.
“The high-yield market is both sizable and growing in importance within fixed income portfolios, yet much of today’s exposure sits in higher-cost structures,” said Sara Devereux, CIO, Vanguard Capital Management, Global Head of Vanguard Fixed Income Group, in a statement. “VCHY expands Vanguard’s ETF lineup with a low-cost, index-based approach to U.S dollar-denominated high-yield corporate bonds, designed to deliver broad, rules-based exposure with a focus on liquidity and precision. It provides investors with a clear and efficient way to help access high yield within a diversified portfolio.”
The 411 on VCHY
Due to it being a new ETF, some detail on VCHY aren’t yet posted on the fund’s homepage, but we know that the fund tracks the Bloomberg U.S. Corporate High Yield 250MM 2% Issuer Capped Index.
The index name provides some clues. For example, the $250 million is the minimum market capitalization of the bonds included in the gauge and the 2% issuer capped is just as it implies – no issuer can command more than 2% of the index.
Full disclosure: I don’t have a Bloomberg terminal, so I couldn’t locate the index’s yield and duration, but there is an established ETF on the market that follows an index comparable to VCHY’s benchmark and that ETF has a duration of three years and a 30-day SEC yield of 7.03%.
VCHY’s homepage makes clear the rookie ETF ‘s asset class is “Intermediate-Term Bond,” which is potentially noteworthy to advisors because intermediate-term bonds are often less correlated to equities than their short- and long-dated peers. That’s something to keep in mind with high-yield corporate debt – a corner of the bond market famously correlated to stocks.
With VCHY, Vanguard Doing Vanguard Things
Not surprisingly, well because it’s legally required, one of the VCHY data points that is available today is the expense ratio. Yes, the new ETF is living up to the famed Vanguard DNA as it charges just 0.05% per year, or $5 on a $10,000 investment. That’s well below the average expense ratio of 0.86% annually on comparable funds.
““Investors need access to a range of high-quality, low-cost solutions to help them meet their income and diversification goals,” said Amma Boateng, Vanguard managing director, in the statement. “VCHY reflects our commitment to thoughtfully expanding our fixed income lineup with tools that allow advisors to incorporate high‑yield exposure into client’s portfolios while taking smart risks.”
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