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Which Vanguard Bond Fund Is Right for You?

In Vanguard’s large stable of bond funds, not all make the cut

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Short-Term Investment-Grade: Buy

VFSTXchartExpenses: 0.2%

I use the Vanguard Short-Term Investment-Grade Fund (VFSTX) as well as the Vanguard GNMA Fund (VFIIX) as higher-yield shock absorbers/cash substitutes in my newsletter’s Model Portfolios, and would recommend them in that role for most any portfolio invested for the long haul. There is no substitute for a money market fund for cash that you need to spend in the near future … but for cash that you don’t need to spend tomorrow, this remains a solid choice for investors looking to boost yield on “dry-powder” holdings.

The 2008 credit market debacle tested this claim — and my faith in the fund. Because it doesn’t invest more than a smidgen in government-backed securities (only 15% or so), Short-Term Investment-Grade took a beating during that brief episode, losing 7.6% at its worst. But its recovery was swift, my confidence was restored, and I remain a huge fan.

Today, though, I am keeping an eye on its yield, currently at 1.06%. While still a nice pickup over Vanguard Short-Term Treasury Fund‘s (VFISX) 0.11%, as Short-Term Investment-Grade’s yield keeps grinding lower, we are getting less compensation for the credit risk, and at some point, it might signal a sale — but not yet.

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