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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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David Waring

David Waring was the founder of LearnBonds.com and has been a major contributor to the extensive library of investing news and information available on the site. Until the launch of Learnbonds.com in late 2011 there was no single site on the internet catering exclusively to the individual bond investor. This was true even though more individuals own stocks than bonds. Learn Bonds was launched to fill that gap.