Executive Summary: Vanguard’s core taxable bond funds offer a mix of safety and yield, but not all funds are equal. I break down the best options for balancing risk and return and explain why Vanguard’s Investment-Grade funds remain solid long-term picks despite my current preference for Treasurys.
According to Vanguard, bond returns will outpace stock gains over the next decade. I think that’s a pretty bold prediction—and one I’m not willing to endorse. But given today’s yields, I expect high-quality bonds will return 4.5% (give or take 1%) over the next decade. That’s a solid rate of return from an asset that can play a critical role in balanced portfolios—offsetting stock market risk.
That makes it a good time to dig deep into Vanguard’s bond funds. With their much-expanded lineup, there’s a lot of ground to cover, so I have to split my coverage. This week, I’ll give you my take on the investment-grade bond funds—these are the funds that should make up the core of your bond portfolio. In the weeks ahead, I’ll discuss the niche and specialty funds before turning to Vanguard’s municipal bond funds.
Admittedly, there is a little more tension in my analysis and ratings than in the past.
For the past two decades, my advice has been simple: Buy corporate bonds and avoid long-maturity bonds. My recommendations are as cut and dried today. While I’d still steer clear of long-maturity bonds, where today’s yields (still) don’t offer sufficient payback for their risks, my view on corporate versus Treasury bonds is more nuanced.
As I explained last week, I’m taking a safety-first approach to the bond market in the Portfolios. I simply don’t think we are being compensated for the risk of owning corporate bonds. Still, not every Treasury fund is a Buy, and not every corporate-bond-heavy fund is a Sell.
Why? Well, my fund ratings are meant to reflect both where I see opportunity today as well as my view of the best funds to own for the long run.
Playing it safe with Treasurys is the prudent play today. However, the corporate bond-heavy Investment-Grade funds—which are well-run and diversified and should outyield and outpace the Treasury funds over time—are still great funds for the long haul.