Vanguard Launches New Income-Focused ETF
The new Vanguard fund targets investors looking for income who are willing to embrace a bit more risk. Last week, Vanguard introduced the Vanguard MultiSector Income Bond ETF (VGMS), a proactively managed fund that focuses on the higher-risk segments of the bond market, primarily high-yield corporate credit. Although there are concerns about a slowing economy, this multi-sector approach is typically viewed favorably in active management.
Rebecca Venter, a senior product manager at Vanguard, mentioned, “We see this strategy as appealing to investors, especially in economic climates that may be a bit uncertain.” She also stated, “I think it’s a great time for ETFs because we feel the credit market is ready for some aggressive management after witnessing considerable volatility.” The fund holds assets that carry more risk than the standard core bonds from Vanguard and other major asset managers.
The fund’s prospectus indicates that it can allocate up to 65% of its holdings to high-yield corporate bonds. Its benchmarks consist of 50% high-yield corporate debt, 30% investment-grade corporate debt, 10% emerging market debt, and 10% asset-backed securities. Venter emphasized that while we should expect certain exposure, it’s an actively managed portfolio and will adapt dynamically.
High-yield corporate bonds, often referred to as junk bonds, are issued by companies with lower credit ratings, which increases the risk of bankruptcy. Although this new ETF hasn’t been in existence long enough to establish an expected yield, similar Vanguard mutual funds currently offer an SEC yield of 5.51%. Notably, the fund’s “below investment grade flexibility” will be leveraged to boost income, and there are additional features implemented.
The expense ratio for the fund stands at 0.30%. Vanguard isn’t the only firm to introduce new multi-sector or high-yield bond funds lately. Other notable launches include the F/M High High 100 (ZTOP), the Polen High Income ETF (PCHI), and the Thornburg Multi-Sector Bond ETF (TMB). According to Factset, both high-yield and broader bond ETF categories have witnessed net inflows this year.
However, it’s worth noting that higher yield funds can still face pricing challenges, even without a significant rise in bankruptcies. For instance, the ISHARES IBOXX $ High Corporate Bond ETF (HYG) has experienced losses for four consecutive days since the announcement of new tariffs by President Donald Trump on April 2, resulting in a total decline of 3.9%.
