Executive Summary: Vanguard's specialty bond funds promise higher yields than the core lineup, but not all of that extra risk is worth taking right now. I round out Vanguard's U.S. taxable bond lineup with mortgage-backed, credit and extended-duration funds—three very different corners of the market and three very different verdicts.
Last week, I analyzed Vanguard's core, investment-grade bond funds—see here and here. But the U.S. bond market alone is nearly $60 trillion, and the bonds Total Bond Market Index (VBTLX) aims to track account for "only" around $30 trillion.
No, I don't think you need to cover every corner of that $60 trillion market. But with so many bonds falling outside the "core investment-grade" category, some opportunities will arise.
Beyond TIPS, which I talked about on Tuesday, Vanguard's remaining specialty bond funds mostly target securities you won't find in Total Bond Market Index's sprawling portfolio—the exception being its two mortgage-backed funds, GNMA (VFIIX) and Mortgage-Backed Securities Index (VMBSX), which the index does hold. These "other" bonds can offer attractive returns at times and complement your core bond holdings, but they also come with their own characteristics and quirks you need to understand before buying in.
Building on Tuesday’s article weighing the opportunity to lock in inflation-beating returns with Treasury Inflation-Protected Securities (TIPS), let's round out the specialty bond lineup with mortgage-backed, credit and extended-duration funds.