Stock market investing is inherently risky because it is prone to market volatility. Investing in fixed-income assets that offer reliable and guaranteed monthly returns is a good way to mitigate the impact of market uncertainty.
Investors new to managing their self-directed investment portfolios might feel overwhelmed choosing the best fixed-income assets to make the most of their investment returns.
Suppose you’re interested in investing in a basket of Canadian short-term bonds in the form of a single investment product.
In that case, my Vanguard VSB ETF review might help you identify a fund that could be ideal for this purpose.
Invest In A Group Of Short-Term Bonds
Invest in the Vanguard VSB ETF to gain exposure to the performance of a broad Canadian bond index with a short-term dollar-weighted average maturity.
- Offers virtually guaranteed monthly cash distributions
- Low-cost exposure to a group of Canadian short-term average maturity investment-grade bonds
- Provides low-risk and steady passive income
- Does not offer any exposure to equity securities
- Returns prone to impact from changing interest rates
What Is Vanguard VSB ETF?
Vanguard Canadian Short-Term Bond Index ETF (VSB) is a low-cost fund that offers you exposure to a broad group of Canadian short-term dollar-weighted average maturity bonds.
The fund is a convenient solution for hands-off investing in a portfolio of investment-grade bonds provided by various issuers in the Canadian bond markets in an easy solution.
The fund was listed on the TSX on November 29, 2011. It boasts a long performance history that you could review to determine what you can expect from its future performance.
Vanguard VSB ETF is designed as a long-term and low-risk holding that offers virtually guaranteed monthly cash distributions. VSB ETF boasts Assets Under Management (AUM) worth $1.39 billion as of April 26, 2022.
Vanguard VSB is a bond ETF that allocates the entirety of its AUM to investment-grade bonds. It does not allocate any assets to focus on the performance of equity securities or other relatively higher-risk asset classes.
The lack of exposure to high-risk asset classes means that the fund does not offer much in terms of capital gains. However, the fund’s reliance on monthly cash distributions through its low-risk underlying holdings makes up for it.
Vanguard VSB ETF seeks to provide you with monthly cash distributions by tracking the performance of a broad Canadian bond index with a short-term dollar-weighted average maturity.
The fund emulates the performance of the Bloomberg Global Aggregate Canadian Government/Credit 1-5 Float Adjusted Bond Index to achieve that goal.
The fund employs a passively managed index-sampling strategy to offer exposure to the investment-grade Canadian short-term bond market.
It delivers current income with high credit quality, making it a viable core holding for investment portfolios.
The underlying index invests in short-term Canadian investment-grade bonds distributed by various issuers, including government and corporate bonds.
Boasting an average maturity of 3 years, the fund allocates its assets to bonds with maturities ranging from one year to five years. It also invests a small portion of its assets in bonds with over five years left till maturity.
The top issuers for Vanguard VSB ETF’s underlying holdings comprise the federal government and treasury, accounting for 26.6% of its asset allocation. Financial institutions come in second, accounting for a 23.0% asset allocation.
Provincial and municipal government-issued bonds make up 20.7% of the fund’s asset allocation.
This section of my Vanguard VSB ETF review will discuss the sector weightings of the fund’s assets. Vanguard VSB ETF invests in a broad Canadian bond index with a short-term dollar-weighted average maturity of one to five years.
Here is a look at a table that shows the distribution of the fund across various credit issuers:
As of April 27, Vanguard VSB ETF allocates 26.6% of its assets to Treasury/Federal bonds.
It allocates 23.0% of its assets to bonds issued by financial institutions and 20.7% to fixed-income securities issued by provincial and municipal issuers.
Vanguard VSB ETF invests in a broad Canadian bond index with maturity periods ranging from one year to bonds with five years left till maturity. It also allocates a small portion of assets to those with bond maturity periods of over five years.
Its weighted average maturity is three years as of March 31, 2022. This section of my Vanguard VSB ETF review will provide a brief overview of the various bond maturities of the fund’s holdings.
As of March 31, 2022, 28.4% of Vanguard VSB ETF’s holdings comprise bonds with maturities of one to two years. 23.9% of its holdings comprise bonds with three to four years till maturity.
23.4% of its holdings include bonds with two to three years till maturity and 18.9% in bonds with four to five years till maturity. 5.4% of its holdings also contain bonds with over five years till maturity.
This section of my Vanguard VSB ETF review will discuss the fund’s performance and returns since its inception.
The fund started trading on the TSX on November 29, 2011. It has a substantial performance history for you to review to get a feel for how VSB did in the past.
The graph above displays the growth of a hypothetical $10,000 invested in Vanguard VSB ETF from its inception on November 29, 2011, till March 31, 2022. In recent months, the impact of lower interest rates and broader uncertainty in global financial markets has resulted in a dip.
However, the fund’s overall performance has been primarily positive through the years. A hypothetical $10,000 invested in Vanguard VSB ETF on its inception would be worth $11,640.
Vanguard VSB ETF’s performance in recent months has been abysmal compared to its overall track record, owing to various macroeconomic factors hindering its growth.
Still, the fund’s long-term performance has a positive momentum despite recent losses. Its market price for the last ten years before the March-ending quarter is in a positive direction by 1.46%.
However, the fund has underperformed its benchmark index, which delivered 1.62% growth in the same period.
Vanguard VSB ETF is a low-risk and low-cost fund that uses a passive investment strategy to replicate the performance of a broad Canadian short-term bond index. Its approach to investing passively allows Vanguard to keep its management expenses to a minimum.
Vanguard VSB ETF has a management fee of 0.10% and a 0.11% Management Expense Ratio (MER).
As of April 26, 2022, Vanguard VSB ETF’s dividend yield is as follows:
- 12-month trailing yield: 2.09%
- Distribution frequency: Monthly
The fund has been designed as a core holding that provides you with passive income through monthly cash distributions. Boasting a trailing 12-month dividend yield of 2.09%, it offers decent cash payouts.
This section of my Vanguard VSB ETF review will discuss a few bond ETFs you could consider as alternatives to investing in VSB ETF.
iShares Broad USD High Yield Corporate Bond ETF (USHY) is a fund designed for long-term investors. The bond ETF offers exposure to the US high-yield corporate bond market, focusing on products from smaller issuers to increase its yield potential.
Boasting an average maturity rating of 5.83 years as of April 26, 2022, the fund boasts a juicy 5.53% 12-month trailing dividend yield that could make it a viable alternative to Vanguard VSB ETF despite its higher MER of 0.15% compared to 0.11% for VSB ETF.
Vanguard Canadian Short-Term Corporate Bond Index (VSC) is another bond ETF issued by Vanguard ETFs. The fund also provides you returns by investing in a group of short-term dollar-weighted Canadian ETFs.
However, Vanguard VSC ETF narrows its focus on short-term and investment-grade non-government corporate bonds. It comes with an average maturity of 2.7 years as of April 26, 2022.
The fund boasts a 2.67% 12-month trailing dividend yield. You could consider VSC ETF a better aggregate bond ETF than Vanguard VSB because it comes with the same 0.11% MER while delivering slightly higher monthly cash distributions.
iShares Core Canadian Universe Bond Index ETF (XBB) is another Canadian Bond ETF you could consider. XBB ETF has a broader focus on the Canadian investment-grade bond market by tracking the performance of the FTSE Canada Universe Bond Index.
It pays monthly cash distributions at a 3.05% 12-month trailing yield. As of April 25, 2022, its average weighted maturity is 10.40 years, and it comes with a lower MER of 0.10%.
You could consider it as a viable alternative to Vanguard VSB ETF as a long-term passive income-generating asset.
How To Buy Vanguard VSB ETF In Canada
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It is always good to diversify your investment portfolio by adding fixed-income assets that provide you with guaranteed monthly returns.
The predictable passive income can mitigate the losses from more volatile asset classes in your portfolio.
Investing in Vanguard VSB ETF offers a solution to gain exposure to the performance of a broad range of short-term maturity investment-grade bonds issued by various Canadian issuers.
Vanguard VSB ETF does not offer very high-yielding returns, but it compensates for it through lower costs and significantly reduced capital risk.
The TSX boasts other bond ETFs that offer relatively higher-yielding returns. Check out my list of the best bond ETFs in Canada to see my breakdown of fixed-income ETFs you can consider for this purpose.
My breakdown of the best monthly dividend ETFs in Canada can also help you identify funds that pay monthly cash distributions.
Consider checking it out if you do not mind investing in funds that focus on equity securities to provide monthly dividend income.