This Affordable Corporate-Bond Fund from Vanguard Is a Good Portfolio Building Block

Key Morningstar Metrics for Vanguard Intermediate-Term Corporate Bond ETF

• Morningstar Medalist Rating: Gold
• Process Pillar: Above Average
• People Pillar: Above Average
• Parent Pillar: High

Vanguard Intermediate-Term Corporate Bond ETF VCIT offers an inexpensive and well-constructed portfolio of investment-grade corporate bonds in the middle of the maturity curve.

The Bloomberg US 5-10 Year Corporate Bond Index, which underpins this fund, sweeps in investment-grade corporate bonds with five to 10 years remaining to maturity. The index excludes floating-rate bonds, contingent capital securities, and bonds with equity features. Eligible bonds must also have at least $300 million outstanding in face value, which ensures the index’s investability. Its market-value-weighting scheme relies on market prices to determine position size, which is efficient and cost-effective in the vast and liquid investment-grade bond market.

The fund typically carries around half of its assets in bonds with a BBB credit rating, in line with the Morningstar Category average and market-value-weighted passive category peers. It parks most of its remaining assets in bonds rated A. This results in an overweight compared with the category average. More flexible active peers often take on tactical allocations in the first rung of junk debt, which the fund excludes. Despite a high stake in bonds rated BBB, the fund has a relatively muted credit risk profile compared with its category peers. This has provided some protection from widening credit spreads during major credit shocks.

The fund’s average duration has fallen short relative to the category average and broader corporate-bond market because of its intermediate focus. Companies have been issuing more long-term bonds in the past decade as interest rates remained around historic lows, pushing up the market’s average duration. A widening duration gap in 2020 and 2021 translated into better performance for the fund during the rate-driven market meltdown of 2022. Duration may change with future issuance activity, but the fund will remain a precise tool for investors targeting the intermediate portion of the maturity curve within corporate bonds.

Vanguard Intermediate-Term Corporate Bond ETF: Performance Highlights

Differences between this portfolio and the category average have helped its category-relative performance. The exchange-traded fund outperformed the category average by 34 basis points annualized from its 2009 inception through July 2024 with similar volatility. The fund’s risk-adjusted performance, as measured by its Sharpe ratio, has been comparable to the category average.

The fund has consistently held up better than its peers when credit spreads widened, thanks to its relatively muted credit risk profile. The fund outpaced its category average by 1.45 percentage points during the coronavirus shock in 2020 from Feb. 20 through March 23. Similarly, it beat the average by 2.9 percentage points between June 2015 and February 2016 as slumping commodities prices drove spreads higher. On the other hand, it will miss out when credit risks are rewarded. The fund trailed its average category peer by 1.86 percentage points between late March and December 2020 as credit spreads rapidly compressed.

The widening duration gap between the fund and the broad corporate-bond market, particularly between 2020 and early 2022, has also added to its relative performance. The fund beat the category average by 1.1 percentage points in 2022 as assets with longer duration suffered from rising rates and inflationary fears.

Gaining an edge from its lower duration is less reliable and is subject to change with the composition of the market. The fund lagged the category average by more than 1 percentage point over the last five months of 2016 despite increasing long-term bond yields. Lower-quality bonds outperformed safer assets during this period, which had a bigger impact on the fund’s performance.