Is VSGBX a Strong Bond Fund Right Now?

If investors are looking at the Government Bond - Short fund category, Vanguard Short-Term Federal Investor (VSGBX) could be a potential option. VSGBX bears a Zacks Mutual Fund Rank of 2 (Buy), which is based on various forecasting factors like size, cost, and past performance.

Objective

VSGBX is one of many Government Bond - Short funds to choose from. Often seen as risk-free assets and described as extremely low-risk from a default perspective,Government Bond - Short funds hold securities issued by the federal government of the United States. Focusing on the short end of the curve, this category can result in n lower yields, but less sensitivity to interest rate fluctuations.

History of Fund/Manager

Vanguard Group is responsible for VSGBX, and the company is based out of Malvern, PA. Since Vanguard Short-Term Federal Investor made its debut in December of 1987, VSGBX has garnered more than $364.27 million in assets. The fund's current manager, Brian Quigley, has been in charge of the fund since January of 2015.

Performance

Of course, investors look for strong performance in funds. VSGBX has a 5-year annualized total return of 1.4%, and it sits in the middle 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 4.61%, which places it in the middle 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. The standard deviation of VSGBX over the past three years is 2.39% compared to the category average of 7.13%. Looking at the past 5 years, the fund's standard deviation is 2.38% compared to the category average of 7.78%. 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.

For those that believe interest rates will rise, this is an important factor to consider. VSGBX has a modified duration of 2.3, which suggests that the fund will decline 2.3% for every hundred-basis-point increase in interest rates.

Income

We must remember to consider the fund's average coupon, as income is traditionally a big reason for purchasing a fixed income security. This metric takes a look at the average payout by the fund in a given year. For example, this fund's average coupon of 2.6% means that a $10,000 investment should result in a yearly payout of $260.

While a higher coupon is good for when you want a strong level of current income, it could present a reinvestment risk if rates are lower in the future when compared to the initial purchase date of the bond. Income is only one part of the bond picture, investors also need to consider risk relative to broad benchmarks.

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, VSGBX is a no load fund. It has an expense ratio of 0.20% compared to the category average of 0.75%. From a cost perspective, VSGBX is actually cheaper than its peers.

This fund requires a minimum initial investment of $3,000, and each subsequent investment should be at least $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 Federal Investor ( VSGBX ) has a high Zacks Mutual Fund rank, and in conjunction with its comparatively similar performance, better downside risk, and lower fees, Vanguard Short-Term Federal Investor ( VSGBX ) looks like a good potential choice for investors right now.

For additional information on this product, or to compare it to other mutual funds in the Government Bond - Short, make sure to go to www.zacks.com/funds/mutual-funds for additional information. If you are more of a stock investor, make sure to also check out our Zacks Rank, and our full suite of tools we have available for novice and professional investors alike.

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This article originally published on Zacks Investment Research (zacks.com).

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