Is VFSTX a Strong Bond Fund Right Now?
If you're looking for a Investment Grade Bond - Short fund category, then a potential option is Vanguard Short-Term Investment Grade Fund Investor (VFSTX). VFSTX possesses a Zacks Mutual Fund Rank of 3 (Hold), which is based on various forecasting factors like size, cost, and past performance.
Objective
VFSTX is part of the Investment Grade Bond - Short category, a segment that boasts an array of other possible selections. Investment Grade Bond - Short funds target the short end of the curve by focusing on bonds that mature in less than two years. Fixed income instruments with this maturity level typically have low duration risk and pay out small yields, at least in comparison to their longer-dated peers. Also, these funds tend to be safer because of their focus on investment grade, but yields will be lower than could be found in the junk bond category.
History of Fund/Manager
Vanguard Group is based in Malvern, PA, and is the manager of VFSTX. The Vanguard Short-Term Investment Grade Fund Investor made its debut in October of 1982 and VFSTX has managed to accumulate roughly $3.01 billion in assets, as of the most recently available information. Daniel Shaykevich is the fund's current manager and has held that role since April of 2018.
Performance
Obviously, what investors are looking for in these funds is strong performance relative to their peers. This fund has delivered a 5-year annualized total return of 2.25%, and is in the middle third among its category peers. But if you are looking for a shorter time frame, it is also worth looking at its 3-year annualized total return of 5.48%, which places it in the top third during this time-frame.
It is important to note that the product's returns may not reflect all its expenses. Any fees not reflected would lower the returns. Total returns do not reflect the fund's [%] sale charge. If sales charges were included, total returns would have been lower.
When looking at a fund's performance, it is also important to note the standard deviation of the returns. The lower the standard deviation, the less volatility the fund experiences. The standard deviation of VFSTX over the past three years is 2.61% compared to the category average of 8.16%. The fund's standard deviation over the past 5 years is 3.01% compared to the category average of 9.19%. This makes the fund less volatile than its peers over the past half-decade.
Bond Duration
Modified duration is a measure of a specific bond's interest rate sensitivity, and is an excellent way to judge how fixed income securities will respond to a shifting rate environment.
If you believe interest rates will rise, this is an important factor to look at. VFSTX has a modified duration of 2.7, which suggests that the fund will decline 2.7% for every hundred-basis-point increase in interest rates.
Income
It is important to consider the fund's average coupon because income is often a big reason for purchasing a fixed income security. Average coupon is a look at the average payout by the fund in a given year. For example, this fund's average coupon of 4.4% means that a $10,000 investment should result in a yearly payout of $440.
While a higher coupon is good for when you want a strong level of current income, it could present a reinvestment risk if rates are lower in the future when compared to the initial purchase date of the bond. Because income is only one part of the bond picture, investors should also consider risk relative to broad benchmarks.
This fund has a beta of 0.43, meaning that it is less volatile than a broad market index of fixed income securities. Taking this into account, VFSTX has a positive alpha of 0.51, which measures performance on a risk-adjusted basis.Ratings
Investors should also consider a bond's rating, which is a grade "AAA" to "D" given to a bond that indicates its credit quality. With this letter scale in mind, VFSTX has 85.2% in medium quality bonds, with ratings of "A" to "BBB". The fund's junk bond component-bonds rated "BB" or below-is at 1.5%, giving VFSTX an average quality of A. This means that it focuses on high quality securities.Expenses
As competition heats up in the mutual fund market, costs become increasingly important. Compared to its otherwise identical counterpart, a low-cost product will be an outperformer, all other things being equal. Thus, taking a closer look at cost-related metrics is vital for investors. In terms of fees, VFSTX is a no load fund and it has an expense ratio of 0.20%.
Investors should also note that the minimum initial investment for the product is $3,000 and that each subsequent investment needs to be at $1.
Fees charged by investment advisors have not been taken into consideration. Returns would be less if those were included.
Bottom Line
With a rank of 'hold' we aren't getting a good signal one way or another on VFSTX. That is why it might be a good idea to consider other items, such as the fund's expense ratio of .2%, and how this compares to other potential options being considered for investment. If cheaper, it might make a decent choice, but a more expensive fund might be worth avoiding. Just make sure to pay attention to its rank in case it shifts in the near future.
For additional information on the Investment Grade Bond - Short area of the mutual fund world, make sure to check out www.zacks.com/funds/mutual-funds. There, you can see more about the ranking process, and dive even deeper into VFSTX too for additional information. And don't forget, Zacks has all of your needs covered on the equity side too! Make sure to check out Zacks.com for more information on our screening capabilities, Rank, and all our articles as well.
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This article originally published on Zacks Investment Research (zacks.com).
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