This $1.2 Trillion Vanguard Business Is Bullish on Credit, Top Executive Reveals

Vanguard's Fixed Income Group, with $1.2 trillion of assets under management, is overweight on credit exposure to corporate bonds and asset-backed securities, targeting more defensive sectors because they are "less subject to some of the volatility," according to the group's global head.

"We're at the lower end because we feel that the bond market credit spreads are relatively low," said John Hollyer, who has been with Vanguard for 28 years, in an interview with TheStreet.

Hollyer acknowledged that "on a short-term basis, equity values are higher than average," adding that the U.S. has a reasonably stable economic outlook.

Hollyer said that the U.S. Federal Reserve, which sets benchmark interest rates, will move gradually. "We expect that as they transition to reduce their balance sheet, they will pause raising rates for six to 12 months to see how the market is responding to lowering the balance sheet," said Hollyer.

In the most recent Beige Book from the central bank, a summary of comments on current economic conditions, the Fed said that the U.S. economy expanded "at a modest to moderate pace across all twelve Federal Reserve Districts in July and August."

Furthermore, three Fed policymakers on Tuesday expressed doubts about a further rate hike in light of weak inflation data.

"We should be cautious about tightening policy further until we are confident inflation is on track to achieve our target," said Fed Governor Lael Brainard, a voting member of the Fed's monetary policy committee.

For investors, Hollyer suggested periodically rebalancing their portfolio and adjusting the asset allocation.

"Every person has their own asset allocation," said Hollyer, noting that asset allocation should be designed to become more conservative as retirement nears.

Investing icon and Vanguard founder Jack Bogle, who retired as the firm's chief executive officer in 1996, told TheStreet in July that he recommends a 50/50 stock/bond allocation, but that ratio varies depending on a person's risk tolerance. If a person can be more aggressive, Bogle suggested a 75/25 stock/bond allocation ratio and vice versa for a more cautious approach.

Aside from asset allocation and risk tolerance, investors must decide between putting their money in an actively managed fund or investing in an index.

"When we talk about investing, we often talk about low cost," Hollyer said. Vanguard offers low-cost investments in an index and in an actively-managed fund, countering the idea latter is high cost, he said. The firm's Fixed Income Group manages more than $350 billion of both active and index corporate bond assets; while Hollyer declined to say the breakdown of funds between active and index, he said there is a little bit more money in index investing than active.

And Vanguard, which launched the first index fund in 1976, is preparing to launch a new index portfolio, the Vanguard Total Corporate Bond exchange-traded fund (ETF), in the fourth quarter of 2017. It will be an ETF of ETFs, investing in three existing Vanguard ETFs: Vanguard Short-Term Corporate Bond ETF (VCSH) , Vanguard Intermediate-Term Corporate Bond ETF (VCIT) and Vanguard Long-Term Corporate Bond ETF (VCLT) . The ETF is expected to result in tighter bid/ask spreads and lower operating expenses than investing directly in the benchmark's constituents; Vanguard estimates an expense ratio of 0.07% upon the ETF's launch.

"The new offering complements our existing lineup of total market funds and will provide investors with low-cost, broadly diversified exposure to the U.S. investment-grade corporate bond market," Hollyer said in a statement. 

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Editors' pick: Originally published Sept. 7.

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