(PUB) Investing 2015

given that the outflows from GNMA dwarf the inflows to its ETF sibling, I’d say this is more a case of investors moving away from mortgage-backed bonds in general. Although the newer bond index funds haven’t been stealing assets from their older rivals, they have held their own when it comes to performance, with one notable exception. The graphs to the right show relative performance, grouping the funds by maturity. In these charts, a rising line means the newer bond ETF is outperforming. Let’s start with the short-maturity funds. Short-Term Government ETF and Short-Term Federal are com- parable, and the older fund’s slightly longer duration and higher yield has led to steady outperformance. Short- Term Corporate ETF has held a perfor- mance and yield advantage over both Short-Term Bond Index and Short-Term Investment-Grade. The ETF’s yield advantage comes from its mandate as a 100% corporate fund as opposed to small differences in duration. (I still prefer the actively managed Short-Term Investment-Grade fund for its proven ability to navigate different market envi- ronments, though for ETF adherents, the corporate offering is a strong one.) On the intermediate-maturity side, Intermediate-TermGovernment ETF and Intermediate-Term Treasury have been very similar in terms of dura- tion, yield and performance. Turning to the corporate index fund, the story is similar to the short-maturity space, as

Short-TermBond ETF Comparison

Interm.-TermBond ETF Comparison

0.90 0.92 0.94 0.96 0.98 1.00 1.02 1.04 1.06 1.08 1.10

0.94 0.96 0.98 1.00 1.02 1.04 1.06 1.08 1.10

Rising line = ETF outperforms

Rising line = ETF outperforms

S-T Gov’t ETF vs. S-T Federal S-T Corp ETF vs. S-T Bond Index S-T Corp ETF vs. S-T I-G

I-T Gov’t ETF vs. I-T Treasury I-T Corp ETF vs. I-T Bond Idx I-T Corp ETF vs. I-T I-G

4/10

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Mortgage-Backed Securities ETF vs. GNMA

Long-TermBond ETF Comparison

1.01

1.06

Rising line = ETF outperforms

Rising line = ETF outperforms

1.04

1.00

1.02

0.99

1.00

0.98

0.98

0.96

0.97

L-T Gov’t ETF vs. L-T Treasury L-T Corp vs. L-T Bond Index L-T Corp vs. L-T I-G

0.94

0.96

0.92

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versus the actively managed fund, Long-Term Investment-Grade . Why? Well, first, Long-Term Government ETF ’s 6.8% average annual return over the last five years is actually ahead of Long-Term Corporate ETF’s 6.6% pace as the rapid decline in interest rates generated big price gains even as yields withered, so owning some government bonds was not a drag >

a yield and performance advantage for Intermediate-Term Corporate ETF has resulted from it being a purely cor- porate bond fund. We’ve seen a bit more parity among Vanguard’s long-maturity funds. In fact, this is the one place where a 100% corporate bond positioning hasn’t led to a performance advantage for the index fund, Long-Term Corporate ETF ,

QUOTABLE

“Dive, Dive, Dive…”

AFTER A RECENT WIN as Fund Manager of the Year by Australia’s Financial Review Smart Investor , Vanguard’s Asia-Pacific head of investments was interviewed about Vanguard’s success in the vast Pacific markets. Rodney Comegys told the journalist that target-date funds were hot, exchange-traded funds were hot, and indexing was hot. And he let it be known that he had once served as an officer on the nuclear-powered sub the U.S.S. Archerfish . “It was a great founda- tion. A fantastic training ground for young leaders and there was an enormous amount of technology to master,” he said. I got a kick out of the article, because Comegys and the article’s

author are both probably unaware of the fact that one of the great- est active fund managers in Vanguard’s history, and in the entire fund industry, was a nuclear engineer and lieutenant in the Navy, serving on the U.S.S. Ben Franklin , a nuclear sub. That manager: Ed Owens, who led Health Care from its 1984 inception until his retirement in December 2012. So the next time you read something trying to impress you with the fact that a nuclear sub officer is recommending indexing as an invest- ment strategy, just remember Ed Owens’ performance legacy, which, I should add, Jean Hynes is ably extending as the fund’s new leader.

The Independent Adviser for Vanguard Investors • December 2015 • 5

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