Yellen apparently had a clear eye on taxes when she elected to put Vanguard High Yield Corporate (VWEAX) into her individual retirement account. Financial advisors often suggest sheltering bond funds in retirement accounts where taxes are deferred. Bonds generate lots of income that is taxed as ordinary income. In contrast, stocks can produce primarily capital gains that are taxed at lower rates. High-yield bonds are particularly prone to deliver taxable income. Because of that, some advisors urge clients to own high-yield bonds only in tax-deferred accounts.
Vanguard High-Yield is actively managed, but it is a favorite of some advisors who normally prefer index funds. The Vanguard fund has an expense ratio of 0.23%, which is lower than what passive exchange-traded funds charge. While high-yield bonds come with default risk, the Vanguard fund is a relatively staid member of the category. Most assets are in bonds that are rated BB, the highest rating in the universe of below-investment grade bonds. Because of its credit quality, the fund does relatively well during periods when investors worry about defaults. In recent years, the Vanguard fund had a flood of assets, and the company closed the fund to new investors.
Yellen appears to be an old-fashioned buy-and-hold investor, but she did make a notable trade in 2010, putting up to $250,000 into Vanguard Short Term Bond Index (VBIRX), a cautious fund that puts most its assets in Treasuries. If the Federal Reserve raises rates, Yellen should suffer only limited damage. When rates rise, short-term bonds are relatively resilient.
At the time of publication, the author had no position in any of the stocks mentioned.Follow @StanLuxenberg This article was written by an independent contributor, separate from TheStreet's regular news coverage.
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