Home Adviser Fund Update Vanguard Launching New Core Bond Fund Published December 31, 2015 Vanguard Announces Active Fund with Junk-Bond Exposure Last Monday, Vanguard announced plans to bring Core BondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. fund to market during the first quarter of 2016, the first actively managed Vanguard fund with a portion dedicated to high-yield (also known as “junk”) bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates.. Lately, Vanguard’s indexed bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. funds—in particular, Total Bond Market Index—have overshadowed the strong performance of active funds like Short-Term Investment-Grade and Intermediate-Term Investment-Grade. The new fund looks to extend that winning streak for Vanguard active management in fixed income. Core Bond will be helmed by a trio of Vanguard managers—Gregory S. Nassour, Brian Quigley and Gemma Wright-Casparius—who will build a portfolio consisting of both investment-grade and non-investment-grade bonds. Junk bonds will comprise up to 5% of assets, “medium quality” bonds will take up as much as 30% of assets and the remaining 65% or so of the fund will be invested in government, agency and investment-grade corporate securities. Up to 10% of the fund can be invested in non-dollar denominated bonds. The idea of Vanguard’s fund (and other “core” bond funds) is to provide a one-stop investing solution for the fixed-income portion of a portfolio—either as the only fund investors need in the space, or as a foundation to build around, complementing it with smaller positions in other funds to tweak duration, sector and credit-quality exposures to their desired levels. In some ways, this seems somewhat like a “me-too” offering from Vanguard, as a number of its competitors already have actively managed core-bond funds on the market. However, Vanguard is once again entering the fray with a cost advantage, providing a cheaper option for investors. Core Bond’s expenses are expected to run 0.25% for Investor shares and 0.15% for Admiral shares, far below the intermediate-term bond fund average expense ratio of 0.84% for actively managed funds. Vanguard Launching Emerging Markets Bond Fund Concurrent with the Core Bond announcement covered above, Vanguard also revealed plans to launch an actively managed bond fund focused on emerging markets fixed-income investments. Unlike Core Bond, however, the firm is not planning to roll it out for individual investors initially, if ever. It’s not clear who will be able to invest in the fund, but there will be both Investor and Admiral shares, and the manager, Daniel Shaykevich, joined Vanguard in 2013 from BlackRock’s emerging markets debt team. We’ll keep you posted as details emerge. Vanguard Stays on Offensive in Fee War As we discussed last January, Vanguard and Fidelity have engaged in a battle over fund fees for more than a decade. And now, Vanguard has pulled back into the lead as the sector-ETF provider with the lowest expense ratios. This campaign dates to October 2013, when Fidelity launched 10 sector exchange-traded fundsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. (ETFs)A type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. that track similar or identical MSCI indexes as Vanguard’s older sector ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index., but undercut them on expenses—a direct foray into a space where Vanguard had been long established as a market leader. It marked yet another blow in the “fee wars” between the two competitors that have been ongoing for more than 10 years. On the sector front, it took Vanguard more than a year to respond. As 2014 came to a close, the fund giant reduced its sector ETFA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. shares’ (and corresponding Admiral shares’) expense ratios from 0.14% to 0.12%, the same Fidelity charges for its sector ETF lineup. This month, Vanguard struck again, cutting fees on most of those funds another two basis points to 0.10% (a couple of share classes saw a three-basis-point reduction to 0.09%), undercutting Fidelity’s offerings. While at it, Vanguard cut fees on a few other funds; see the table below for a full list. The competition to see which firm could provide the lowest fees on index funds began in 2004, when Fidelity slashed fees on key index funds to less than Vanguard was charging for similar offerings. The two fund titans’ efforts at outmaneuvering their competitor has persisted with numerous feints and jabs since. In May 2010, Vanguard made investing in its ETFs commission-free for all brokerage clients, and later that year sent shockwaves through the ETF industry when it launched 19 ETFs tied to institutional index funds. As a refresher, an expense ratio tells shareholders how much they are paying to support the firm’s annual cost of operating a particular fund or ETF. The expense ratio is calculated by dividing annual operating expenses by the average dollar value of the fund’s or ETF’s assets under management. We are always encouraged when fund companies cut costs for investors. While Fidelity and Vanguard will likely continue to battle for investment dollars, the real winners of the fee wars are investors who can keep more money in their accounts compounding over the long term. Vanguard Expense Ratio Changes Effective 12/22/15 Fund Share Class Ticker Symbol Former Expense Ratio Current Expense Ratio Consumer Discretionary ETF ETF VCR 0.12% 0.10% Consumer Discretionary Index Admiral VCDAX 0.12% 0.09% Consumer Staples ETF ETF VDC 0.12% 0.10% Consumer Staples Index Admiral VCSAX 0.12% 0.10% Energy ETF ETF VDE 0.12% 0.10% Energy Index Admiral VENAX 0.12% 0.10% Explorer Value Investor VEVFX 0.66% 0.65% Extended Duration Treasury ETF ETF EDV 0.12% 0.10% Financials ETF ETF VFH 0.12% 0.10% Financials Index Admiral VFAIX 0.12% 0.10% FTSE Social Index Investor VFTSX 0.27% 0.25% Health Care ETF ETF VHT 0.12% 0.09% Health Care Index Admiral VHCIX 0.12% 0.10% Industrials ETF ETF VIS 0.12% 0.10% Industrials Index Admiral VINAX 0.12% 0.10% Information Technology ETF ETF VGT 0.12% 0.10% Information Technology Index Admiral VITAX 0.12% 0.10% Intermediate-Term Corporate Bond ETF ETF VCIT 0.12% 0.10% Intermediate-Term Corporate Bond Index Admiral VICSX 0.12% 0.10% Intermediate-Term Government Bond ETF ETF VGIT 0.12% 0.10% Intermediate-Term Government Bond Index Admiral VSIGX 0.12% 0.10% Long-Term Corporate Bond ETF ETF VCLT 0.12% 0.10% Long-Term Corporate Bond Index Admiral VLTCX 0.12% 0.10% Long-Term Government Bond ETF ETF VGLT 0.12% 0.10% Long-Term Government Bond Index Admiral VLGSX 0.12% 0.10% Materials ETF ETF VAW 0.12% 0.10% Materials Index Admiral VMIAX 0.12% 0.10% Mega Cap ETF ETF MGC 0.11% 0.09% Mega Cap Growth ETF ETF MGK 0.11% 0.09% Mega Cap Value ETF ETF MGV 0.11% 0.09% Mortgage-Backed Securities ETF ETF VMBS 0.12% 0.10% Mortgage-Backed Securities Index Admiral VMBSX 0.12% 0.10% Short-Term Corporate Bond ETF ETF VCSH 0.12% 0.10% Short-Term Corporate Bond Index Admiral VSCSX 0.12% 0.10% Short-Term Government Bond ETF ETF VGSH 0.12% 0.10% Short-Term Government Bond Index Admiral VSBSX 0.12% 0.10% Telecommunication Services ETF ETF VOX 0.12% 0.10% Telecommunication Services Index Admiral VTCAX 0.12% 0.10% Utilities ETF ETF VPU 0.12% 0.10% Utilities Index Admiral VUIAX 0.12% 0.10% Source: Vanguard. About Adviser Investments Adviser Investments is a full service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trustsA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process., institutions and foundations since 1994, and have more than 3,500 clients across the country and over $6 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, with particular expertise in Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. 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