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This fund is currently yielding around 5.5%. A question: Let's say there is another bear market, and the NAV drops 20%. Will the yield actually go up, or will it also drop the corresponding 20%? In other words, if one were to buy this fund only for the income, not caring about a (temporary) loss in principal, it would seem to be a good bet, if the income were to remain stable.
@Soupkitchen: There is an inverse relationship between bond prices and interest rates. When interest rates rise, bond prices fall. And if you own a bond fund, the price of your fund will fall by the average duration of the fund, multiplied by the magnitude of the rise in interest rates. Regards, Ted
Look at a long term chart of VWEHX to determine the range of potential principal loss or gain in percentage terms you might incur compared to the 5.5% yield during its up and down cycles.
OK, let me put this another way. If the fund were to loose 20%, would I also loose 20% of the income that I had been receiving prior to the loss, or would I receive the same income per share (let's say each share received 1$ income per year, would that change if the fund were to loose money?). I am comparing this to stock dividends, which end up going up when the market goes up, since the amount paid per share doesn't change.
The yields on junk bond funds go up during bear markets. In 2008 yields were in the teens. But in answer to your question, the dividend payout also goes down because of portfolio defaults. Even the best of junk bond funds will have portfolio defaults during severe bear markets. There is no exact correlation percentage-wise between how much a junk fund loses and the dividends it pays out. Obviously, the junkier the fund, the more defaults and hence the more its dividends are impacted. Junk bonds only had one year where they lost over 20% and that was a once in a generation event. VWEHX is not a junky junk fund. As an aside, the average junk bond fund YTD has returns approaching 6%. Not bad for a market the experts were expecting to crash.
OK, let me put this another way. If the fund were to loose 20%, would I also loose 20% of the income that I had been receiving prior to the loss, or would I receive the same income per share (let's say each share received 1$ income per year, would that change if the fund were to loose money?). I am comparing this to stock dividends, which end up going up when the market goes up, since the amount paid per share doesn't change.
If you owned the fund and were receiving $1 you should continue to received about $1 (unless a lot of companies went bankrupt and could not pay interest on their bonds).
You could go to Yahoo and look at the historical prices/dividends to see what happened in previous down turns for the fund.
If corporate bond prices fell rapidly (also dragging down a fund's NAV) human nature suggests many investors would dump these assets. In order to attract new buyers, the bonds would have to pay a higher rate of interest. So yes - yields would rise over time.
The other side of the coin is that the companies issuing these bonds would be forced into paying higher interest rates on money they borrow - likely pushing the weakest among them into default. So, it's a two-edged sword. I would not want to own junk during the early stages of such a credit crunch. But, if I could time it to buy junk only a month or so before the crisis abated, than I'd load up on them and enjoy the bounce in share price along with the higher than normal yields.
HY funds differ greatly in the degree of risk they assume. Some engage in tactics like credit default swaps that greatly increase your risk. And it's near impossible for the typical fund investor to fully understand the risk profile. (Oppenheimer screwed up several of their income/bond funds before the 07-08 crisis, suffered huge losses, and the company canned many of the managers after the fact.)
Vanguard's HY fund used to enjoy a well earned reputation for going conservative. I suspect it still does - but haven't kept up recently. One benefit of a conservative approach (for any type of fund) is that fewer shareholders are likely to bolt during a downturn. A rapidly shrinking investor base along with falling security prices makes for a bad combination - and compounds losses for those who stay with the fund.
Good question Soup. I'm not the expert Junkster is. Just some thoughts.
The fund flows and manager decisions will also impact the distributions and yield. If the fund is in redemption as bonds are tanking, the fund could unload the more liquid assets (likely higher quality, lower yielding bonds) to meet the redemptions, this would increase the distributions. On the other hand, if the manager decides thing could get worse and moves the fund to lower risk bonds, the yield could drop significantly.
One of the better discussions on MFO I have seen recently. Like a primer on high yield bond funds. Thanks for a lively discussion, with a variety of viewpoints that made sense
Comments
Regards,
Ted
You could go to Yahoo and look at the historical prices/dividends to see what happened in previous down turns for the fund.
The other side of the coin is that the companies issuing these bonds would be forced into paying higher interest rates on money they borrow - likely pushing the weakest among them into default. So, it's a two-edged sword. I would not want to own junk during the early stages of such a credit crunch. But, if I could time it to buy junk only a month or so before the crisis abated, than I'd load up on them and enjoy the bounce in share price along with the higher than normal yields.
HY funds differ greatly in the degree of risk they assume. Some engage in tactics like credit default swaps that greatly increase your risk. And it's near impossible for the typical fund investor to fully understand the risk profile. (Oppenheimer screwed up several of their income/bond funds before the 07-08 crisis, suffered huge losses, and the company canned many of the managers after the fact.)
Vanguard's HY fund used to enjoy a well earned reputation for going conservative. I suspect it still does - but haven't kept up recently. One benefit of a conservative approach (for any type of fund) is that fewer shareholders are likely to bolt during a downturn. A rapidly shrinking investor base along with falling security prices makes for a bad combination - and compounds losses for those who stay with the fund.
Good question Soup. I'm not the expert Junkster is. Just some thoughts.