Bonds Beyond the Index | Specialty Bond Funds
You can earn more income by venturing beyond the “total bond market.” But with higher yields come greater risks—tread carefully and focus primarily on Vanguard’s junk and emerging markets bond funds.
Over the past month or so, I’ve covered a lot of ground on bonds and bonds funds. If you are just joining us or want to revisit one of the topics I’ve covered, below are the five installments from my Bonds 101 series:
Last week, I discussed Vanguard’s core, investment-grade bond funds in depth—see here. But the bond market is massive—over $100 trillion in size—and when most people talk about the bond market, well, consider that the bonds Total Bond Market Index (VBTLX) aims to track “only” account for around $25 trillion of that $100 trillion. Clearly, many bonds fall outside of the “core investment-grade” category.
With the exception of its two mortgage-backed bond funds, GNMA (VFIIX) and Mortgage-Backed Securities Index (VMBSX), Vanguard’s specialty bond funds target securities that you won’t find in Total Bond Market Index’s sprawling portfolio. These “other” bonds can offer attractive returns at times and complement your core bond holdings, but they also have their own characteristics and quirks that you need to understand before buying in.
So, let’s explore Vanguard's specialty and foreign bond funds.