The 3 Vanguard Bond ETFs With the Best Yield for Retirees Right Now

The Bogleheads 3-fund portfolio calls for an allocation to aggregate bond funds. They’re broadly diversified, low cost, and do a decent job of reducing overall portfolio volatility.

But if your goal is yield, it’s not going to cut it. If you’re looking for a bond allocation that can generate a 30-day SEC yield that has at least a chance of supporting a 4% withdrawal rate, aggregate bond ETFs fall short. They simply hold too much in low-yielding Treasuries and mortgage-backed securities.

That doesn’t mean you need to pile into equities though or use covered calls. If you’re willing to take on a bit more credit risk, Vanguard’s bond lineup actually offers a number of options that can push yields above 4%.

The trade-off is that during periods of stress, these won’t hold up as well as government bonds. Still, under normal credit conditions, they tend to be fairly resilient. And in classic Vanguard fashion, they remain very affordable.

Here are three Vanguard bond ETFs currently paying 30-day yields of 4% or more that could fit into a retirement portfolio, as long as you understand the risks.

Ultra-Short-Term Bonds

The first option is the Vanguard Ultra-Short Bond ETF (BATS: VUSB). After a 0.10% expense ratio, it currently offers a 4.27% 30-day SEC yield.

Now, one thing that trips up investors is that Vanguard explicitly states this is not a money market fund. It doesn’t have a fixed $1 net asset value, and it does take on more credit risk.

That said, in practice, it’s still one of the lower-risk bond ETFs available. There are two main reasons for that.

First is duration. VUSB has an average duration of about one year, which measures sensitivity to interest rates. That’s very short. Rising rates won’t hurt it much, and falling rates won’t boost it significantly either. Its yield tends to move closely with prevailing short-term rates.

Second is credit quality. While only about 20% of the portfolio is AAA-rated, the bulk of it, just under 70%, sits in A and BBB-rated bonds. That’s still firmly investment grade. So while VUSB is not as safe as Treasuries, it remains relatively conservative while offering a higher yield.

U.S. Corporate Bonds

If you look at a typical aggregate bond ETF, it includes Treasuries, mortgage-backed securities, and corporate bonds. If you want higher yield, you essentially strip out the government exposure and focus on corporates, which is exactly what the Vanguard Total Corporate Bond ETF (NASDAQ: VTC) does.

After a very low 0.03% expense ratio, it currently offers a 4.76% 30-day SEC yield. The ETF tracks the Bloomberg U.S. Corporate Bond Index

VTC comes with a longer duration of about 6.7 years. That means it’s more sensitive to interest rates. Rising rates can push prices down, while falling rates can provide a tailwind.

Credit quality is still investment grade, but slightly lower than VUSB. Over 90% of the portfolio is split between A and BBB-rated bonds, with some exposure to AAA- and AA-rated issues.

One important consideration here is taxes. Corporate bond income is taxed as ordinary income at both federal and state levels. That can significantly reduce your after-tax return.

Vanguard notes that over the past three years, VTC’s 4.65% annualized return dropped to just 2.77% after taxes on distributions. For that reason, it’s better suited for tax-advantaged accounts.

High-Yield Bonds

Finally, if you’re comfortable taking on more credit risk, the Vanguard High Yield Active ETF (BATS: VGHY) offers one of the highest yields in Vanguard’s bond fund lineup.

After a 0.22% expense ratio, it currently pays a 6.48% 30-day SEC yield. That’s higher than the other options, and while the fee is higher too, it’s still very reasonable for an actively managed ETF.

Looking at the portfolio, the differences are clear. Duration sits at about 2.9 years, putting it between VUSB and VTC in terms of interest rate sensitivity. But credit quality is where things really change.

Only about 1.26% of the portfolio is investment grade. The majority is below that, with roughly 49% in BB-rated bonds, 34% in B-rated bonds, and about 9.5% in CCC or lower. These are distressed issuers with a much higher risk of default.

Active management can help with security selection, but it doesn’t eliminate risk. There’s a reason for the yield. In a downturn, high-yield bonds can behave more like equities. There’s a common saying that in a crisis, correlations go to one.

You shouldn’t expect this ETF to hold up well in a broad market selloff. But in stable environments, that elevated yield can be attractive, especially with monthly distributions.