1100 13th Street, NW, Suite 750Washington, DC 20005202.887.6400Customer Service: 800.544.0155
All Contents © 2019The Kiplinger Washington Editors
By Steven Goldberg, Contributing Columnist
| November 19, 2018
If you’ve built a solid portfolio of funds, the last thing you want to do is tear it apart and build a new one simply because the stock market is doing one of its periodic swan dives.
But that doesn’t mean you shouldn’t tinker around the edges in a market that acts like it wants to go down. You might cut, say, 5% of your stock allocation and put the proceeds into a low-risk bond fund.
If you think your investments need more rearranging, you might take your most volatile fund and replace it with a lower-risk offering.
Where to look for a replacement? Vanguard funds include a fistful of first-rate defensive offerings that, while they’ll still likely lose money in a bear market, they should still hold up better than most other funds.
Here are the six best Vanguard funds to own in a bear market. Note: Some of these funds are only available directly from the low-cost provider. At the same time, if you use a discount broker, you may be able to buy cheaper Admiral shares without meeting Vanguard’s minimum, which typically ranges from $10,000 to $50,000 depending on the fund.
Data is as of Nov. 18, 2018.
Market Value: $51.7 billion
Expense ratio: 0.22%
Minimum investment: $3,000
Vanguard Wellesley Income (VWINX, $26.12) is a fund that even the most nervous investor will find easy to hold onto – no matter how badly the stock market behaves. Over the past three years, Wellesley, which is run by Wellington Management, has been a little more than half as volatile as Standard & Poor’s 500-stock index. Roughly 61% of the fund is in bonds, and the remainder is in blue-chip stocks.
John Keogh, the bond manager, sticks largely to issues rated single-A and above. Less than 20% is in Baa bonds, which are still investment-grade. Most of the bond portfolio is in corporates and governments, along with a smattering of asset-backed bonds. Keogh does own some long-term bonds. VWINX’s portfolio has a duration of 6.3 years, meaning that portion of the fund should fall 6.3 percentage points in price when rates tick up one percentage point.
Michael Reckmeyer, the chief stockpicker, buys mainly mega-caps. He hunts for stocks that pay relatively generous dividends and can keep raising those payouts. He’s careful to buy stocks only when they’re fairly cheap, which gives the fund a distinct value tilt. Its biggest sectors are health care (18.4% of stocks), financial services (14.5%) and consumer staples (13.3%), with JPMorgan Chase (JPM), Verizon (VZ) and Johnson & Johnson (JNJ) the top three holdings at the moment.
Despite its conservative nature, the fund has returned an annualized 8.8% over the past 10 years. That includes a loss of 1% so far this year. VWINX yields 3.4%.
Market Value: $100.9 billion
Expense ratio: 0.25%
Vanguard Wellington (VWELX, $41.62) is much more aggressive than Wellesley, but it’s still a relatively tame beast. With 65% of the fund in stocks and the remainder in bonds, it’s a classic balanced fund – with the same allocation between stocks and bonds that many investment advisors recommend for the majority of their clients. It’s about two-thirds as volatile as the Russell 1000 Value Index.
The bond portfolio is virtually a carbon copy of Wellesley’s, as well it should be given that John Keogh manages the bond portion of both funds. As with Wellesley, he sticks largely to single-A bonds and above with less than 20% in Baa-rated debt. The duration is 6.3 years, identical to Wellesley’s. The fund yields a little less, though, at 2.7%.
Edward Bousa, the equity manager, is slightly more aggressive than Wellesley’s Reckmeyer. He’s willing to buy growth stocks after they’ve been knocked down in price. For instance, he bought Alphabet (GOOGL) when its price was depressed toward the end of 2014, and it continues to be a top-10 holding.
But the fund still leans toward value. Bousa, like Reckmeyer, looks for solid dividend payers. As far as sectors, he currently likes financials (22.7% of stocks), health care (15.5%) and technology (12.1%).
Wellington is the better pick for most investors, except for those in the later years of retirement or others who may need to spend their money relatively soon. Over the past 10 years, the fund has returned an annualized 11.04%.
Market Value: $20.7 billion
Expense ratio: 0.07%
Minimum investment: N/A
Vanguard Short-Term Corporate Bond ETF (VCSH, $77.74) is a low-risk index bond exchange-traded fund that offers investors a healthy yield of 3.6%.
The fund, which tracks the Barclays US 1-5 Year Corporate index, takes little credit risk. All its holdings are investment-grade bonds from the likes of Anheuser-Busch InBev (BUD), CVS Health (CVS) and Bank of America (BAC), although 40% are rated only Baa or below. Duration is just 2.7 years – almost a full percentage point less than the yield. That means VCSH should make money on a total return basis even if rates rise one percentage point.
A small risk: More than 40% of the fund’s assets are in financial-sector debt.
Also note that this is available as an Admiral class mutual fund (VSCSX).
Market Value: $58.6 billion
Expense ratio: 0.20%
Want safer still? Consider the index ETF’s near-clone, Vanguard Short-Term Investment-Grade Fund (VFSTX, $10.40).
Using the same benchmark, this fund is actively managed by Vanguard’s Samuel Martinez and Daniel Shaykevich. It’s a little safer than the ETF because it owns not only corporates, but some Treasuries. Also, only 21% of its assets are Baa or below, and it doesn’t have nearly as much in financials.
But VFSTX is a very similar fund. It yields a bit less at 3.27% and has a slightly shorter duration of 2.6 years. It is a bit more expensive, though, at 0.20% in fees.
Market Value: $3.1 billion
Vanguard Global Minimum Volatility (VMVFX, $14.00) is a fascinating, if complicated, fund that could be just the ticket for investors who want to dial down risk.
Run in-house by Antonio Picca, it takes a quantitative approach to delivering lower risk-adjusted returns than its benchmark, the FTSE Global All Cap Index. It invests roughly half its assets in foreign stocks, and the other half in U.S. stocks. It hedges away all foreign currency risk.
The fund takes several steps designed to limit volatility. It tilts toward stocks with historically low volatility and stocks that have low correlations with one another. The manager keeps sector weights within five percentage points of their FTSE index weightings, but he overweights defensive sectors, such as consumer staples and health care, which together account for a quarter of assets.
The FTSE index lost 12.1% from June 2015 through February 2016, but the Vanguard fund lost just 4.6%, according to Morningstar.
If you buy this fund, remember: It will almost sure lag during bull markets. From January 2014 through July 2018, the fund captured 40% of the market’s declines but only 77% of its advance, Morningstar says.
Over the past three years, the fund has been about halfway between Wellington and Wellesley in terms of volatility. It has been less volatile than Wellington but more volatile than Wellesley. Since inception, the fund, which was launched in late 2013, has returned an annualized 10%.
Just keep in mind that VMVFX is relatively new and hasn’t been tested in a bear market, while Wellington and Wellesley have been.
Market Value: $26.1 billion
Expense ratio: 0.19%
Vanguard Limited-Term Tax-Exempt (VMLTX, $10.79) is a plain vanilla, short-term municipal bond fund. It yields 2.2% and its duration is 2.6 years, meaning it should just lose only a little bit should rates rise by one percentage point.
Run in-house by Adam Ferguson, the fund tracks Barclays 1-5 Year Municipal Bond Index. Ferguson and the rest of Vanguard’s fixed-income team make big-picture judgments, which they use to adjust the duration and credit quality of the fund. The vast majority of VLTMX’s bonds are single-A or above, with just about 11% below.
The trick to this fund is hiding in plain sight: Its low expense ratio. Ferguson doesn’t have to do anything fancy to beat most of his peers – he just has to avoiding making big bets that turn sour. So he doesn’t make big bets. Over the past 10 years, the fund has returned an annualized 2.0%, almost exactly equaling the index.
Buy the Admiral shares (VMLUX) if you can handle the minimum initial investment of $50,000. They charge just 0.09%.