Vanguard Closes High-Yield Fund To New Investors

by: The Financial Lexicon

On Thursday, Vanguard announced that its High-Yield Corporate Fund was closing to most new investors. Unless you are a part of Vanguard's Asset Management Services or Vanguard's Flagship Services, you will not be able to open a new position in the fund. The closure affects both Investor and Admiral Shares. At this time, existing investors are still allowed to add to their current holdings in the fund.

If you were mulling over an investment in Vanguard's high-yield fund and now find yourself wondering how you should go about building your high-yield bond exposure, fret not. There are other options. While you are not likely to find an exact replica of the yield, expense ratio, duration, credit quality, and holdings of Vanguard's $16.9 billion fund, you can get close. The high-yield corporate bond ETFs -- HYG, JNK, and PHB -- can certainly be used in an attempt to gain virtually the same exposure you would have in Vanguard's now-closed fund.

Below is a table outlining the yields, expense ratios, and durations of the Vanguard fund and the three aforementioned high-yield ETFs:

30-day SEC Yield

Expense Ratio

Duration (years)

Vanguard Investor Shares



4.5 (average)

Vanguard Admiral Shares



4.5 (average)




4.32 (effective)




4.56 (modified)




3.81 (modified)

Click to enlarge

With durations for all the aforementioned funds in the same ballpark, you might be tempted to focus more on yields and expense ratios to make your determination about which high-yield fund to get into. However, do not forget to examine credit quality, as it will help to explain why the yields can vary so much between the funds.

HYG and JNK, on the whole, carry a collective lower credit quality than Vanguard's fund and PHB do. While HYG and JNK have low double-digit percentage exposure to bonds rated Caa1/CCC+ or lower by Moody's and S&P, respectively, Vanguard's fund has roughly 2% exposure to this category. PHB actually has zero exposure to that part of the ratings spectrum. Furthermore, HYG and JNK also have higher exposure to bonds rated B1/B+, B2/B, and B3/B- by Moody's and S&P than do PHB and Vanguard's fund. Finally, PHB and Vanguard's high-yield fund have several percentage points more exposure to bonds carrying investment grade ratings than HYG and JNK do.

With all this in mind, how might an investor who wants access to Vanguard's now-closed High-Yield Corporate Fund gain similar exposure as the fund? If you are uncomfortable with the slightly higher risk profiles of HYG and JNK, and find PHB's yield simply too low for a high-yield corporate bond fund, you might consider splitting your investment evenly between PHB and HYG or JNK. Another idea would be to consider investing some portion of your available funds, perhaps 50% to 75%, in HYG or JNK and then using the remainder of your funds to purchase individual bonds in the Ba1/BB+ region (the highest "junk" rating). You might have to extend the maturities on those individual bonds to make the portfolio work for you, but as long as you are comfortable with the credit risk, maturity profile, and yield on the individual bonds, this may be the way to go.

I recently ran a screen for corporate bonds with at least one of the Ba1/BB+ ratings, maturities of five to 15 years, and yields of 5% or more. The screen returned 72 bonds. And that's just bonds with a Ba1 or BB+ rating. There are certainly other individual bonds with high-yield ratings worth exploring as well.

Three examples of Ba1/BB+ rated bonds returned by the screen include the following:

Peabody Energy's (BTU) senior unsecured note (CUSIP: 704549AH7) maturing 9/15/2020 has a 6.50% coupon and is asking 101.25 cents on the dollar (6.302% yield-to-maturity before commissions). It has a make whole call and pays interest semiannually. Moody's currently rates the note Ba1; S&P rates it BB+.

QEP Resources' (NYSE:QEP) senior unsecured note (CUSIP: 74733VAB6) maturing 10/1/2022 has a 5.375% coupon and is asking 99 cents on the dollar (5.501% yield-to-maturity before commissions). It pays interest semiannually, has a make whole call, and is continually callable at par beginning 7/1/2022. Moody's currently rates the note Ba1; S&P rates it BB+.

Limited Brands' (LTD) senior unsecured note (CUSIP: 532716AU1) maturing 2/15/2022 has a 5.625% coupon and is asking 101.391 cents on the dollar (5.437% yield-to-maturity before commissions). It has a make whole call and pays interest semiannually. Moody's currently rates the note Ba1; S&P rates it BB+.

Please be aware that prices in the over-the-counter U.S. bond market may vary depending on the broker you use. I discuss this in my article "Are You Paying Too Much For Your Bonds?" The current prices may also differ greatly from those listed at the time this article was written. For additional information on any of these notes, please contact your broker or read the indenture.

Also, please do your own due diligence on the financial profiles of the companies mentioned in this article. Only you can determine if taking the counterparty risk of purchasing individual bonds is suitable for you.

Disclosure: I am long BTU and HYG. I am also long BTU's CUSIP 704549AH7.