LB Rating: Vanguard Short-Term Federal Fund (VSGBX)

Symbol: VSGBX
Category: Short-Duration Bond Funds
Style: Passive
LB Rating: ****  4 Stars
Last Updated: 9/12/12


Useful Links:

Choosing a Bond Fund with LB Ratings
Understanding bond mutual fund fees
Bond Mutual Funds vs. Bond ETFs
Passive vs Active Bond Funds



Vanguard Short Term Federal Fund Overview

Summary: This is a very low risk fund with a low fee. It holds only Treasury Bonds with short average maturities.  If you need a place to store cash for a few weeks or a few months, this is a safe and boring place to do so.

Commentary: We hate recommending this fund.  The SEC yield is a paltry 0.32%.  This is not a reflection on the management of the fund (its an index fund which captures the performance of the short-term 1 – 5 year Treasury Market) but, a reflection of the current low-yield environment. You can earn a much better yield by plunking your money into a one-year CD. (View CD rates here)

Assuming you have a good reason not to put money in a CD, this is a good safe choice.  Your loaning money to the US Government, so there is no credit risk.

If interest rates rise, this fund will lose a little bit of money, but not much.  The Fed has indicated that they intend to keep rates low until 2015, which means rates are unlikely to trade more than a half percent higher than current levels.  Assuming  rates move up by half a percent, the fund would lose about 1.1% in value.  However, the yield on the fund would be increasing while the value of the fund dropped.  So, the fund would pay a half percent more in yield.

Over the course of a year, the fund’s total return would only drop by 6/10ths of a percent as a result of a half percent rise in interest rates.  In other words, this fund is fairly well protected against interest rate risk.


Rating Criteria

Fees: Excellent The annual expense ratio is only 0.20%.  If you have $50k to invest and buy the Admiral shares, it goes down to 0.10%.

Tracking: Average The bond index which its tracks contains over 700 bond issues.  However, the fund holds a little over 100 bonds.  As a result, the Vanguard Short-Term Federal Fund has a duration of 0.4 years less than the index it tracks.  Over the last year, that has lead to the fund outperforming the index by over 0.3%, but could just as easily lead to underperformance.

Liquidity: Excellent It trades short-term treasuries which are some of the most liquid securities in the world.

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