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A Broad, Cost-Effective Corporate Bond ETF

This article was originally published on ETFTrends.com.

The Vanguard Intermediate-Term Corporate Bond ETF (VCIT) is one exchange traded fund that can help investors boost income on bond investments without taking on significantly higher risk.

VCIT, one of the kings among intermediate-term corporate bond exchange trade funds, is also one of the least expensive funds in this category. This Vanguard fund charges just 0.07% per year, or $7 on a $10,000 investment, making it cheaper than 91% of competing funds, according to Vanguard data.

VCIT seeks to track the performance of a market-weighted corporate bond index with an intermediate-term dollar-weighted average maturity, namely the Bloomberg Barclays U.S. 5-10 Year Corporate Bond Index. While VCIT holds debt issues with maturities between 5 and 10 years, they are all investment-grade holdings to minimize default risk.

VCIT “provides market-cap-weighted exposure to investment-grade U.S. corporate bonds with between five and 10 years until maturity,” said Morningstar. “It is one of the lowest-cost options in the corporate-bond Morningstar Category and has tightly tracked the Bloomberg Barclays U.S. 5-10 Year Corporate Bond Index. While there’s plenty to like here, it’s important to note that this fund has heavy exposure to the financial-services sector, which could be a source of risk. It earns a Morningstar Analyst Rating of Silver.”

View On VCIT

Fixed-income ETF investors should look into the opportunities in the short-end of the yield curve to generate income while mitigating duration risk and consider ways to blend active and passive exposures to position portfolios in today’s bond market.

Related: Fixed-Income ETF Strategies for Rising Interest Rates

VCIT has an average duration of 6.4 years and an average effective maturity of 7.5 years. The fund's yield-to-maturity is 4.1%. This Vanguard ETF holds nearly 1,730 bonds and has $18.6 billion in assets under management.

“The strategy’s three- and five-year annualized returns of 2.2% and 2.8% were behind the category average. This underperformance was driven principally by the portfolio’s relatively conservative construction that excludes below-investment-grade bonds. Its risk-adjusted returns, measured by Sharpe ratio, were in line with the category average over the same periods thanks to its significant cost advantage,” according to Morningstar.

VCIT has a 30-day SEC yield of 3.45% and is down 4.06% year-to-date.

For more information on corporate debt, visit our corporate bonds category.