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A Cautious High-Yield Bond Fund

Silver-rated Vanguard High Yield Corporate focuses on the higher quality tiers of the junk-bond market.

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Sarah Bush: Like its competitors in the high-yield category, Vanguard High Yield Corporate invests in the debt of highly leveraged companies that have below investment grade--or junk--credit ratings. But this fund takes a somewhat more cautious approach than many of its peers. It traffics more lightly than most in the riskiest high-yield bonds. Instead it focuses on BB and B tiers of the market, which tend to have lower default rates. As a result, this fund doesn't always keep up with its peers when high yield rallies, but it typically holds up better than most when defaults spike and lower quality bonds suffer losses.

That was true in 2015 and into early 2016 when the fund held up much better than its average competitor amid losses for high-yield funds. A focus on less risky tiers of the junk-bond market helped as did the team's significant underweighting to energy bonds; these bonds were hard hit as oil prices plunged. Although the fund lagged some as junk bonds came roaring back in later 2016, its long-term record is solid.

Sarah Bush does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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