3 Top Vanguard Fixed-Income Funds

Key Takeaways

Fixed-income funds provide investors with safety, security, preservation of capital, and steady income at regular intervals.
The underlying index of a fixed-income fund determines yield and risk exposure.
Adding bond funds to your portfolio can help diversify your holdings and spread the risk from other securities, like stocks and exchange-traded funds.
Vanguard offers a variety of bond and fixed-income funds that are well-suited for individual investors' needs.
Among Vanguard's fixed-income offerings are VWAHX, VWEHX, and VWITX, which provide exposure to government and corporate bonds.

Fixed-Income Funds

The investment market is divided into a number of different categories. One of the most common is the equity market, which involves trading (buying and selling) stocks and other related securities, such as mutual funds. Equities are fairly volatile since they are susceptible to numerous risks, such as price swings, changing economic conditions, geopolitical risks, and currency risks among others.

In order to mitigate the risks associated with equity markets, financial professionals often advise investors to diversify their holdings to include other types of securities. One market that provides some degree of safety and security is the fixed-income market. These instruments aren't susceptible to most macroeconomic risks and are normally given priority if the issuer goes bankrupt and/or must liquidate its holdings.

Not only are fixed-income securities given priority over stockholders and other such assets, but they also provide investors with steady income until maturity. This comes in the form of periodic interest or dividend payments. Unlike stock returns, which are unpredictable, fixed-income yields are commonly known ahead of time. And they help investors preserve their capital, where equities can lose (or gain) value over time.

Vehicles may include bonds (corporate, as well as government bonds), Treasury bills (T-bills), money market securities, certain asset-backed vehicles, preferred stocks, and fixed-income funds. But there is a trade-off related to the lower risk associated with these vehicles. This comes in the form of lower returns and investors (typically bondholders) have no say in the direction of the issuing entity.

Now let's take a look at three popular Vanguard funds that give investors exposure to the fixed-income market.

Historical performance may not always be indicative of future performance when it comes to fixed-income investments. Investors should consider how it factors into these investments against key benchmarks.

1. Vanguard High-Yield Tax-Exempt Fund Investor Shares (VWAHX)

Net Assets: $14.7 billion
Yield to Maturity: 4.3%

The Vanguard High-Yield Tax-Exempt Fund Investor Shares is a long-term municipal bond fund that seeks to provide high, yet sustainable income that is tax-exempt at the federal level. The fund has 3,275 bonds in its portfolio, the majority of which mature between 20 to 30 years (35.3%) and 10 to 20 years (31.8%). Under normal market conditions, the fund invests the lion's share of its total net assets in investment-grade municipal bonds determined by nationally recognized rating agencies.

The fund's benchmark is the Bloomberg Municipal Bond Index, which includes most investment-grade tax-exempt bonds issued by municipalities. It has outperformed its benchmark returning 1.88% and 2.92% on a five-year and 10-year basis, respectively. Returns for the index during those periods were 1.65% and 2.28%.

Vanguard requires an initial minimum investment of $3,000. Thereafter, investors are charged an annual net expense ratio of 0.17%, which is significantly lower than the average ratio of municipal bond funds with similar holdings at 0.88%, according to Vanguard.

Make sure you consult a financial professional whenever you make any changes to your investment portfolio, even if you're an experienced investor.

2. Vanguard High-Yield Corporate Fund Investor Shares (VWEHX)

Net Assets: $23.3 billion
Yield to Maturity: 6.9%

The Vanguard High-Yield Corporate Fund Investor Shares seeks to provide a high level of income by investing in low- to mid-quality corporate bonds, many of which are called junk bonds. These instruments are rated below Baa by Moody's or have similar ratings from other bond rating agencies. There are over 800 high-risk, high-yield bonds in the fund, which represent a number of sectors.

Managed by the Wellington Management Company, Vanguard requires a minimum investment of $3,000 in order to begin investing in the fund. It charges a low annual expense ratio of 0.23%, which is far lower than similar corporate bond funds, According to Vanguard, the average ratio for similar funds was 0.90%.

The fund's benchmark is the High-Yield Corporate Composite Index. VWEHX has underperformed the benchmark slightly, returning 3.10% and 3.69% on a five-year and 10-year basis, compared to the 3.35% and 3.87% returns of the benchmark for the same periods.

3. Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (VWITX)

Net Assets: $70.0 billion
Yield to Maturity: 3.4%

The Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares is a municipal bond fund that aims to provide investors with a moderate but sustainable level of federally tax-exempt income. It has about 12,700 bonds in its portfolio. More than 40% of the portfolio is comprised of bonds that mature within 10 to 20 years. VWITX is expected to invest at least 75% of its holdings in municipal bonds in the top three credit rating categories determined by nationally recognized rating organizations, such as Moody's or Standard and Poor's (S&P).

The fund's benchmark is the Bloomberg 1-15 Year Municipal Index. The average five-year return for the fund was 1.74% while the index returned 1.71% during the same period. The fund and index returned 2.12% and 2.05%, respectively, in 10 years. This means the fund has slightly outperformed its benchmark.

The fund is managed by the Vanguard Fixed Income Group and charges an annual expense ratio of 0.17%, which is lower than the average expense ratio of 0.66% of similar municipal bond funds, according to Vanguard. To invest in this fund, a minimum investment of $3,000 is required.

How Do You Take Funds Out of Vanguard Bond Funds?

You must complete a redemption request if you want to take some or all of your money from any Vanguard bond funds. You can do so online by logging into your Vanguard account and going to the "Sell Funds" page. Make sure you select your bank account from the "Where Is Your Money Going?" drop-down menu. If your banking information isn't linked to your Vanguard account, you can complete a wire transfer form for one-time redemptions. This process normally takes anywhere between seven and 10 business days to complete.

Why Are Vanguard Bond Funds Doing So Poorly?

There are a number of reasons why Vanguard's bond funds and those offered by other companies don't perform nearly as well as they have in the past. Bond yields (and therefore, bond funds) are greatly impacted by monetary policy. When interest rates fall, bond yields drop, which ultimately makes them more pricey to purchase.

Bond yields also drop when there is a flock to safety, so yields fall when demand increases. Take the COVID-19 pandemic, which drove investors to purchase more bonds as uncertainty rose in the equity market. While there's no way to tell when things will change, investors can expect bond yields (and thus, Vanguard's bond funds) to see an improvement during stronger economic environments.

Which Vanguard Bond Fund Is Safest?

The safest and best Vanguard bond fund (or any other company's for that matter) all depends on your personal goals, risk tolerance, and investment capital. Some of the most common bond funds offered by the company include the Vanguard High-Yield Tax-Exempt Fund Investor Shares, Vanguard High-Yield Corporate Fund Investor Shares (VWEHX), and Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (VWITX). Another popular Vanguard bond fund is the Total Bond Market Index Fund Admiral Shares (VBTLX). All of these have low expense ratios compared to others in the market and perform relatively well compared to their benchmark indexes.

Are Bonds a Good Investment?

Whether bonds are a good investment depends wholly on your investment goals and strategy. An important point to note is that bonds give investors safety and security. They're low-risk investments that provide a steady stream of income at regular periods. Unlike stocks, they are more likely to preserve wealth. Keep in mind, though, that this low level of risk comes with lower returns.

The Bottom Line

Fixed-income funds can provide you with safety and security, especially when there's so much uncertainty in financial markets. Unlike equities, fixed-income securities preserve your capital while giving you steady income—all with a low level of risk. But this does mean you'll have to sacrifice the chance for the big returns, similar to those seen by those who invest in the stock market.

If you're not phased by all of this, consider Vanguard's funds. The company is just one of many that offer investors choices for fixed-income funds. Keep in mind that regardless of which company's offerings you choose, it's always a good idea to consult a financial professional about which investments are right for you.