There are plenty of choices in the Investment Grade Bond - Short category, but where should you start your research? Well, one fund that might be worth investigating is Vanguard Short-Term Investor Growth Income Investor (VFSTX). VFSTX possesses a Zacks Mutual Fund Rank of 1 (Strong Buy), which is based on nine forecasting factors like size, cost, and past performance.
We note that VFSTX is an Investment Grade Bond - Short option, which is an area loaded with different options. Investment Grade Bond - Short funds focus on the short end of the curve, generally with bonds that mature in less than two years. Fixed income instruments with this maturity level usually have low duration risk, while they also pay out small yields, at least when compared to their longer-dated peers. Additionally, the focus on investment grade will make funds here safer, but yields will be lower than in the junk bond category.
History of Fund/Manager
Vanguard Group is responsible for VFSTX, and the company is based out of Malvern, PA. Vanguard Short-Term Investor Growth Income Investor made its debut in October of 1982, and since then, VFSTX has accumulated about $7.99 billion in assets, per the most up-to-date date available. Samuel C. Martinez is the fund's current manager and has held that role since April of 2018.
Obviously, what investors are looking for in these funds is strong performance relative to their peers. VFSTX has a 5-year annualized total return of 2.18% and it sits in the top 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 2.11%, which places it in the top third during this time-frame.
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. Over the past three years, VFSTX's standard deviation comes in at 1.21%, compared to the category average of 6.47%. Over the past 5 years, the standard deviation of the fund is 1.25% compared to the category average of 6.66%. This makes the fund less volatile than its peers over the past half-decade.
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.
For investors who think interest rates will rise, this is an important factor to consider. VFSTX has a modified duration of 2.45, which suggests that the fund will decline 2.45% for every hundred-basis-point increase in interest rates.
Since income is, of course, a big reason for purchasing a fixed income security, it is always important to consider the fund's average coupon. This metric takes a look at the average payout by the fund in a given year. For example, this fund's average coupon of 3.27% means that a $10,000 investment should result in a yearly payout of $327.
If you are looking for a strong level of current income, a higher coupon is a good choice, though it could pose a reinvestment risk; these risks can occur 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 0.37, 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 0.45, which measures performance on a risk-adjusted basis.
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 47.39% in high quality bonds rated at least 'AA' or higher, while 48.99% are of medium quality, with ratings of 'A' to 'BBB'. The fund has an average quality of AA, and focuses on high quality securities.
For investors, taking a closer look at cost-related metrics is key, since costs are increasingly important for mutual fund investing. Competition is heating up in this space, and a lower cost product will likely outperform its otherwise identical counterpart, all things being equal. In terms of fees, VFSTX is a no load fund. It has an expense ratio of 0.20% compared to the category average of 0.76%. Looking at the fund from a cost perspective, VFSTX is actually cheaper than its peers.
Investors need to be aware that with this product, the minimum initial investment is $3,000; each subsequent investment needs to be at least $1.
Overall, Vanguard Short-Term Investor Growth Income Investor ( VFSTX ) has a high Zacks Mutual Fund rank, and in conjunction with its comparatively strong performance, better downside risk, and lower fees, this fund looks like a good potential choice for investors right now.
This could just be the start of your research on VFSTXin the Investment Grade Bond - Short category. Consider going to www.zacks.com/funds/mutual-funds for additional information about this fund, and all the others that we rank as well for additional information. Want to learn even more? We have a full suite of tools on stocks that you can use to find the best choices for your portfolio too, no matter what kind of investor you are.
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