Is VFSTX a Strong Bond Fund Right Now?
Have you been searching for a Investment Grade Bond - Short fund? You might want to begin with Vanguard Short-Term Investment Grade Fund Investor (VFSTX). VFSTX possesses a Zacks Mutual Fund Rank of 3 (Hold), which is based on various forecasting factors like size, cost, and past performance.
Objective
VFSTX is classified in the Investment Grade Bond - Short segment by Zacks, an area full of investment potential. By investing in bonds that mature in less than two years, Investment Grade Bond - Short funds are focused on the short end of the curve. Fixed income instruments at this maturity level tend to have low duration risk, but they also pay out small yields compared to their longer-dated peers. Furthermore, these funds' focus on investment grade make them 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 Investment Grade Fund Investor debuted in October of 1982. Since then, VFSTX has accumulated assets of about $3.45 billion, according to the most recently available information. Arvind Narayanan is the fund's current manager and has held that role since November of 2019.
Performance
Of course, investors look for strong performance in funds. VFSTX has a 5-year annualized total return of 2.22%, and it sits in the middle third among its category peers. If you're interested in shorter time frames, do not dismiss looking at the fund's 3-year annualized total return of 5.35%, which places it in the top third during this time-frame.
It is important to note that the product's returns may not reflect all its expenses. Any fees not reflected would lower the returns. Total returns do not reflect the fund's [%] sale charge. If sales charges were included, total returns would have been lower.
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. VFSTX's standard deviation over the past three years is 3.02% compared to the category average of 8.23%. Over the past 5 years, the standard deviation of the fund is 3.33% compared to the category average of 9.48%. This makes the fund less volatile than its peers over the past half-decade.
Bond Duration
Modified duration is a measure of a given bond's interest rate sensitivity, so when judging how fixed income securities will respond in a shifting rate environment, it is an excellent figure to look at.
If you believe interest rates will rise, this is an important factor to look at. VFSTX has a modified duration of 2.75, which suggests that the fund will decline 2.75% for every hundred-basis-point increase in interest rates.
Income
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 calculates the fund's average payout in a given year. For example, this fund's average coupon of 4.58% means that a $10,000 investment should result in a yearly payout of $458.
For those seeking a strong level of current income, a higher coupon is typically good news. However, it could pose a reinvestment risk 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 0.51, 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 0.15, which measures performance on a risk-adjusted basis.Ratings
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 82.44% in medium quality bonds, with ratings of "A" to "BBB". The fund's junk bond component-bonds rated "BB" or below-is at 2.15%, giving VFSTX an average quality of A. This means that it focuses on high quality securities.Expenses
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 0.81%. From a cost perspective, VFSTX is actually cheaper than its peers.
Investors should also note that the minimum initial investment for the product is $3,000 and that each subsequent investment needs to be at $1.
Fees charged by investment advisors have not been taken into consideration. Returns would be less if those were included.
Bottom Line
Overall, Vanguard Short-Term Investment Grade Fund Investor ( VFSTX ) has a neutral Zacks Mutual Fund rank, and in conjunction with its comparatively similar performance, better downside risk, and lower fees, Vanguard Short-Term Investment Grade Fund Investor ( VFSTX ) looks like a somewhat average choice for investors right now.
For additional information on the Investment Grade Bond - Short area of the mutual fund world, make sure to check out www.zacks.com/funds/mutual-funds. There, you can see more about the ranking process, and dive even deeper into VFSTX too for additional information. Zacks provides a full suite of tools to help you analyze your portfolio - both funds and stocks - in the most efficient way possible.
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This article originally published on Zacks Investment Research (zacks.com).
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