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May 30th, 2012
On Thursday, Vanguard announced that its High-Yield Corporate Fund was closing to most new investors. Unless you are a part of Vanguard’s Asset Management Services or Vanguard’s Flagship Services, you will not be able to open a new position in the fund. The closure affects both Investor and Admiral Shares. At this time, existing investors are still allowed to add to their current holdings in the fund.
If you were mulling over an investment in Vanguard’s high-yield fund and now find yourself wondering how you should go about building your high-yield bond exposure, fret not. There are other options. While you are not likely to find an exact replica of the yield, expense ratio, duration, credit quality, and holdings of Vanguard’s $16.9 billion fund, you can get close. The high-yield corporate bond ETFs — HYG, JNK, and PHB — can certainly be used in an attempt to gain virtually the same exposure you would have in Vanguard’s now-closed fund.
HYG and JNK, on the whole, carry a collective lower credit quality than Vanguard’s fund and PHB do. While HYG and JNK have low double-digit percentage exposure to bonds rated Caa1/CCC+ or lower by Moody’s and S&P, respectively, Vanguard’s fund has roughly 2% exposure to this category. PHB actually has zero exposure to that part of the ratings spectrum. Furthermore, HYG and JNK also have higher exposure to bonds rated B1/B+, B2/B, and B3/B- by Moody’s and S&P than do PHB and Vanguard’s fund.