Exchange traded funds have highly altered investment opportunities in today's financial markets. Investors now have the easy access and ability to receive exposure to various investments in different markets that the typical individual investor did not have prior access to. This article outlines the highlights of an exchange traded bond fund that targets high growth U.S. corporate debt and concludes with explaining how fixed income investors can benefit from exposure to a diverse set of moderate to high grade fixed income securities. The security I will be focusing on is Vanguard Intermediate Term Corporate Bond ETF (VCIT).
VCIT is an exchange traded corporate bond fund that attempts to follow the performance of the Barclays Capital U.S. 5-10 Year Corporate Bond Index, which principally is solely a subset of the Barclays Capital U.S. Aggregate Float Adjusted Index. The Barclays Capital U.S. 5-10 Year Corporate Bond Index measures the investment return of U.S. dollar denominated, investment-grade, fixed rate, taxable securities issued by companies in the industrials, utilities, and financial services industries. The securities vary from five to ten years in maturity. VCIT is managed by Joshua Barrickman and has been since November of 2009.
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Figure 1: VCIT Price Graph
VCIT has an extremely low expense ratio of only 0.14% and is currently trading slightly below the 52 week high of $88.80. The 52 week price variance is $8.60, indicating very low signs of any volatility. For an exchange traded bon fund, VCIT has displayed aggressive growth for quite some time now as you will see in the graph above. Steady growth has been consistent from the black line representing the YTD mark as well as from the previous year. Below you will see an example of a different exchange traded bond fund that shows very similar signs of growth.
VCIT Stacks Up to Inflation-Protected Securities
Figure 2: iShares Barclays TIPS Bond Fund (TIP)
The graph above depicts the price performance over the past three years of iShares Barclays TIPS Bond Fund , which is an exchange traded fund as well. However, TIP corresponds to the price and yield performance of Barclays U.S Treasury Inflation Protected Securities Index, which is highly correlated and serves as the underlying index that measures the overall performance of the inflation-protected public obligation of the U.S. Treasury. As you will notice the graphs are very similar in nature. Both exchange traded funds have provided steady aggregate growth from YTD (shown by the black line) as well as since the beginning of 2011.
Inflation is inevitably catching up with us. Thus forcing U.S. Treasury securities to become increasingly riskier and less attractive to individuals who have been long advocates for their "risk-free return". However, given the prevailing market conditions individual investors need to be seeking investments in precious metals, Treasury securities that offer protection from inflation such as 3-year TIPS, and various exchange traded funds that offer exposure to a diversified investment set. VCIT provides this low risk exposure that will help minimize the firm specific risk investors face when purchasing single corporation debt. VCIT provides an alternative approach to investing in corporate debt that will provide investors with steady, yet diversified growth.
Sources: The Wall Street Journal, TD Ameritrade, and Google Finance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.