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Summary

  • VCLT has little risk.
  • The ETF has a high dividend.
  • Its price will fluctuate with changes in interest rates.

Vanguard's Long-Term Corporate Bond Index (VCLT) is an ETF that started on 11/19/2009. It's comprised of 1320 bond issuances. 80% of the bonds are concentrated in the U.S. The fund mostly invests in the industrial sector at 67%. Over 90% of the bonds are investment grade and yield between 4% and 8%. Most of these bonds mature between 15-30 years and have a duration of 13.5 years. The statistics of VCLT can be seen here.

There are many good reasons to have VCLT in your portfolio. VCLT is less risky compared to stocks. All of the bonds are investment grade and there are a lot of them. It's very unlikely that any of the bonds will default. Even if some did I don't think having a few defaults would affect its price.

If yield is important to an investor then another reason to like VCLT is its dividends. Since the fund is investing in bonds it is receiving a steady stream of income. When this happens the investors can also rely on receiving a steady income. VCLT has always distributed its dividends on a monthly basis. The monthly dividend has ranged from $0.28 to $0.394 during the months of February through November. During December the range has been between $0.329 and $0.599. It makes two payments in December and skips the payment in January. During its first full 4 years the annual dividend has been $4.445, $3.951, $4.203, and $4.01, respectively. This translates into yields of 5.74%, 4.9%, 4.66%, and 4.68%, respectively. This is a much better yield than what you could get on other investments that are more risky. A small portion of its dividend data is below. I used the same format for 2012, 2011, and 2012. The stock price and dividend information comes from Yahoo Finance and the monthly 20 Yr. Treasury rates which can be viewed here.

Date

Dividends

Record Date Price

Yield

20 Yr Treasury bond rate

2013

12/24/2013

0.332

83.28

0.40%

3.63

11/29/2013

0.332

82.62

0.40%

3.50

10/31/2013

0.313

83.73

0.37%

3.38

9/30/2013

0.339

81.99

0.41%

3.53

8/30/2013

0.351

81.86

0.43%

3.49

7/31/2013

0.335

83.43

0.40%

3.31

6/28/2013

0.326

82.95

0.39%

3.07

5/31/2013

0.324

87.13

0.37%

2.73

4/30/2013

0.353

92.84

0.38%

2.55

3/28/2013

0.339

89.18

0.38%

2.78

2/28/2013

0.339

90.51

0.37%

2.78

1/31/2013

0.327

89.3

0.37%

2.68

Summary 2013

Total Dividend

Average price

Total yield

Average Rate

$4.01

$85.735

4.68%

3.12

VCLT also charges very low fees. Right now the expense ratio is 0.12% which is below the industry average. If you use Vanguard as a brokerage firm you get another advantage of not having to pay any transactions fees.

There are other things to consider before investing in VCLT. One is to figure out what drives its price. Bonds and bond funds move differently than stocks. VCLT should tend to be the same price as its underlying assets. The NAV on July 30 was $91.10 and the price was $90.50. Bonds will usually move for three reasons. The first reason is the relationship between the current interest rate versus their own yield. The second reason is their default rate. The third reason is how close they are to their redemption date. The default risk for VCLT is low as all the bonds are investment grade. The redemption rate for these bonds in VCLT is far into the future so that may make the price fluctuate more. Interest rate risk would be the biggest concern for VCLT. The bonds in the fund have an average maturity of 24 years and duration of 13.5. If interest rates skyrocket that would drive the price of VCLT down. If rates go down the price would go up. When you look at the Yahoo Finance chart below you can see that its price moves frequently. In 2011 and 2013 you can see big dips. Those dips correspond to the debt ceiling crises. During these times default risk seemed more real and interest rates rose. The rate on the 20 year treasury was higher in 2011 and 2013 than it was in 2012. When government rates go higher bond prices go lower and the yield increases. You can see this more clearly from the table after the graph below. This is the same table I used above but hid the data to make it more readable. In 2010 VCLT had its lowest average price but highest yield. The treasury rate was at its highest point too. In 2012, VCLT had its highest average price and that correlates to its lowest yield and the lowest treasury rate. The price of VCLT is most directly impacted by long term government rates.

(click to enlarge)

Summary 2013Total DividendAverage priceTotal yieldAverage Rate
4.0185.7354.68%3.12
Summary 2012Total DividendAverage priceTotal yieldAverage Rate
4.20390.30754.66%2.54
Summary 2011Total DividendAverage priceTotal yieldAverage Rate
3.95180.7954.90%3.62
Summary 2010Total DividendAverage priceTotal yieldAverage Rate
4.44577.66255.74%4.03

VCLT will never get price appreciation the way stocks do. Bond holders don't get to take part in any excess gains or profits. The owners of a stock can get dividends and also a gain on the sale of the stock if there is news to move it. VCLT gets the coupons from the bonds as dividends and nothing else. The only way VCLT can increase in price is if interest rates decrease to drive it past the purchase price.

I think that VCLT offers a lot for just being a corporate bond fund. It yields more than most stocks at over 4%. Even if stocks have a higher yield they're probably not as safe an investment. On top of the yield it has also appreciated in price. My graph shows that the price has increased 20.15% since its inception which comes to be about 9.4% a year. That is a pretty good return.

Disclosure: The author is long VCLT. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.