Income investors will find a lot to like with these Vanguard exchange-traded funds.
Many investors reach a point in their lives when growth isn’t nearly as important as income. The reliability of that income is also paramount.
One great alternative is to invest in exchange-traded funds (ETFs). It’s simpler than choosing individual stocks and bonds. Granted, you still must be smart about which ETFs you buy. You’ll especially want to consider the funds’ costs.
Vanguard enjoys widespread popularity because of its low costs and the variety of ETFs offered. Income investors can find several attractive funds, but three especially stand out right now. $100,000 spread equally across these Vanguard ETFs could pay you $5,400 in annual income.
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1. Vanguard Emerging Markets Government Bond ETF
The Vanguard Emerging Markets Government Bond ETF (VWOB -0.29%) currently offers a 30-day SEC yield (the fund’s annualized income over a trailing 30-day period dividend by its assets) of 6.1%. Investing one-third of $100,000 in this ETF would provide an annual income of roughly $2,033 based on this yield.
This Vanguard ETF attempts to track the performance of the Bloomberg USD Emerging Markets Government RIC Capped Index. The index is passively managed and provides exposure to bonds primarily issued by governments in emerging markets.
The ETF and its underlying index often won’t exactly align. For example, the Vanguard Emerging Markets Government Bond ETF currently owns 747 bonds with an average effective maturity of 12.1 years. By comparison, the Bloomberg Index includes 726 bonds with an average effective maturity of 12.2 years.
Vanguard launched this fund in May 2013. Although the ETF didn’t perform very well during much of this period, it’s been a different story over the last year with a gain of 19%. Costs haven’t eaten into the fund’s returns much, though. The Vanguard Emerging Markets Government Bond ETF’s annual expense ratio is 0.2%, well below the average expense ratio of 0.99% for similar funds.
2. Vanguard Long-Term Corporate Bond ETF
The Vanguard Long-Term Corporate Bond ETF (VCLT 0.08%) has a 30-day SEC yield of 5.28%. This translates to around $1,760 of annual income if you invested another one-third of your initial $100,000 in the fund.
As its name indicates, this Vanguard ETF focuses on corporate bonds with maturities well into the future. It owns 2,996 bonds with an average effective maturity of 22.5 years. These bonds are all investment grade but typically not with the highest credit rating: 43.5% have a credit rating of A (low level of default risk) and 45.3% have a credit rating of BBB (moderate level of default risk).
The fund first traded publicly in November 2009. Since its inception, the Vanguard Long-Term Corporate Bond ETF has delivered an average annual return of 5.06%.
You won’t pay through the nose to buy this ETF. Its annual expense ratio is a super-low 0.04%. The average expense ratio of similar funds is 0.83%.
3. Vanguard Long-Term Bond ETF
The Vanguard Long-Term Bond ETF‘s (BLV 0.03%) 30-day SEC yield is 4.82%. An investment of the final one-third of your $100,000 would provide an annual income of roughly $1,607, bringing your total income per year to $5,400.
This ETF seeks to track the performance of the Bloomberg U.S. Long Government/Credit Float Adjusted Index. The index gives exposure to the long-term, investment-grade U.S. bond market.
The Vanguard Long-Term Bond ETF owns 3,159 bonds with an average effective maturity of 22.4 years. Nearly half (49.4%) of the bonds held by the fund were issued by the U.S. government.
Like the Vanguard Long-Term Corporate Bond ETF, this ETF has performed very well over the last 12 months, soaring 17%. However, since its inception in April 2007, the fund’s average annual return is a much lower 4.68%.
Another common denominator for this fund with the others mentioned is its low costs. The ETF’s annual expense ratio is only 0.04%.
Risks to consider
Although these three Vanguard ETFs own a large number of bonds, they won’t give investors a diversified portfolio. The Vanguard Long-Term Corporate Bond ETF and Vanguard Long-Term Bond ETF, in particular, have high correlations. If one doesn’t perform well, the other usually won’t either.
Longer-term bonds tend to be more sensitive to interest rates. If the Federal Reserve raises rates, the prices of these ETFs will likely decline.
All bonds face the risk of defaults. The Vanguard Emerging Markets Government Bond ETF could be more volatile than the other two and probably isn’t a great pick if you’re risk-averse. Of these three Vanguard ETFs, the Vanguard Long-Term Bond ETF is arguably the least risky because of its heavy concentration in U.S. government bonds.
Still, bonds are usually viewed as safer investments than stocks. These three Vanguard bond ETFs could be excellent alternatives for many income investors.
