Vanguard launched its Corporate Bond ETF (ticker symbol VTC) in November 2017. It is a three-in-one ETF that holds short-term, intermediate-term, and long-term corporate bonds.

With Vanguard offering more than 50 index ETFs and more than 15 bond ETFs, where does VTC fit into an index fund investor’s portfolio?

Vanguard Corporate Bond ETF (VTC)

Previously, to get exposure to corporate bonds without Treasury bonds at Vanguard, you had to invest in one of three corporate bond index funds:

  1. Vanguard Short-Term Investment-Grade Fund Admiral Shares (VFSUX)
  2. Vanguard Intermediate-Term Corporate Bond Index Fund Admiral Shares (VICSX) or Vanguard Intermediate-Term Corporate Bond ETF (VCIT)
  3. Vanguard Long-Term Corporate Bond Index Fund Admiral Shares (VLTCX) or Vanguard Long-Term Corporate Bond ETF (VCLT)

Vanguard is marketing VTC as a 3-in-1 fund where you get all three of these corporate bond funds in a single ETF.

The expense ratio of the Vanguard Corporate Bond ETF (VTC) is 0.07%, identical to its other corporate bond ETFs, but slightly higher than its total bond ETF (BND, ER = 0.05%).

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VTC Alternatives

The best alternative to VTC as a total corporate bond ETF is LQD (iShares iBoxx $ Invmt Grade Corp Bd ETF). It is the largest corporate bond ETF, with over $35 billion in assets under management. It also has a low expense ratio of 0.15%, albeit a little bit higher than VTC.

Fidelity offers a total corporate bond ETF called FCOR, but it is not very large or liquid, and has a significantly higher expense ratio of 0.45%.

Vanguard Corporate Bond ETF (VTC) Historical Returns

With VTC being a new ETF in 2017, they do not have extensive historical return data, but we can take a look at the historical returns of its underlying index, the Bloomberg Barclays U.S. Corporate Bond Index.

The performance of the Barclays U.S. Corporate Bond Index is slightly higher than the general total bond market, as measured by the Barclays U.S. Aggregate Bond Index. Using data from Bloomberg on the U.S. Corporate Bond Index and the U.S. Aggregate Bond Index, let’s take a look at how the two indices have performed in the last 10 years.

The corporate bond market has higher returns than the total bond market. This is because corporate bonds are riskier than Treasury bonds, because you take on the credit risk that the underlying companies will default (i.e. go bankrupt). Since you are buying an index, the risk of default is spread across hundreds or thousands of companies, but even in good economic times, some companies will go bankrupt and investors in their corporate bonds will lose money.

VTC is Total Bond Fund (BND), without the Treasuries and other government bonds

VTC another opportunity for investors to slice-and-dice their portfolio. If you want exposure to corporate bonds, but don’t want the Treasury bond exposure in BND, you could purchase a total corporate bond fund.

Treasury bonds are assumed to be “risk-free”

The bond market can broadly be divided into Treasuries and corporates. Sure there are other bonds such as municipal bonds, but the vast majority of bonds are one of these two types.

Treasury bonds, by definition, are assumed to have no credit risk. While the U.S. Treasury is not rated AAA by all the major credit agencies, it is generally considered to have the lowest risk of default. While the value of Treasuries can rise and fall in value like any bond, they are lower risk than corporate bonds.

You take on credit risk with corporate bonds

The return on corporate bonds can roughly be decomposed into general interest rate risk and credit risk. Your expected returns are essentially the Treasury bond, plus the return you get for taking on the credit risk that the companies will default on their bonds.

This is why the corporate bonds have higher historical returns than Treasury bonds or total bond market.

But because some of the corporate bonds will default, the returns on corporate bonds will be more volatile, as seen in the graph of the U.S. Corporate and U.S. Aggregate Bond Indices above.

Vanguard's VTC is essentially a total bond fund (BND) without the Treasuries. Higher return and less volatility Click To Tweet

VTC Criticism: Size and Liquidity

One of the major concerns of VTC at the time of this publication (January 2018) is that it is so new. Vanguard reported that the fund had less than $30 million in assets at the end of 2017. The average daily volume on the stock is around 15,000 shares according to Morningstar.

By comparison, the iShares corporate bond ETF LQD has over $35 billion in assets and has an average trading volume of over 6 million shares per day.

While Vanguard has a great brand and the daily volume and assets under management will eventually rise, at this time (January 2018), I would prefer the larger and more liquid ETF (LQD) rather than VTC, even though VTC has a lower expense ratio.

If interested in a total corporate bond ETF, pick LQD over VTC because of its larger size and liquidity. Click To Tweet

Conclusion

I personally do not invest in VTC — I prefer the total bond market that contains both Treasury and corporate bonds.

VTC could eventually be a good option for investors who want to have a more aggressive investment in their bond portfolio. With the higher expected returns of corporate bonds compared to Treasury bonds comes higher volatility.

However, there are currently other corporate bond ETFs with higher volume and more liquidity than VTC (particularly iShares’s corporate bond ETF), and I would prefer those until VTC can increase their assets under management.

What do you think? Do you use a total bond index fund for your bond portfolio, or do you slice and dice? Do you own VTC?

2 COMMENTS

  1. Seems like an appropriate bond ETF to jump into when I start putting money into bonds in a couple of years. I’ll still be young and aggressive. Will have a couple year’s of data at that point, too. I’ll have to keep it in mind.

    Looks like as of today, there are 3505 various bonds in the VTC. I suppose that would do a pretty good job of protecting you from default depending on what the weight of each bond is in the overall fund.

  2. I have never owned a corporate bond fund. I have owned individual corporates in the past. I mainly have BND in tax protected and Munis in taxable. I know lots of people think there is no need for corporate bonds especially Junk bonds since you take your risk with your equity allocation.

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