Vanguard investment grade bond fund tracking error

Tracking error is one means of measuring active manager performance against an appropriate market index. Vanguard’s investment grade bond funds are actively managed, defined asset class funds. The funds include three bond funds structured across three bond maturity levels: short, intermediate, and long term bonds. In addition to these three portfolios, Vanguard manages a high yield corporate bond fund and three corporate bond index ETFs.

Over the measurement period the short and intermediate term funds have produced an average tracking error measuring about 30 basis points higher than their expense ratios. Reasons for this tracking error can be attributed:

  • To the fact that both funds predominately have held portfolios that have lower average duration than the benchmark duration. This fact is reflected in the funds frequently having betas lower than the benchmark.
  • Another factor leading to tracking error is that the funds often hold portfolios that do not precisely match the credit quality distribution of the benchmark index.
  •  
    The long term fund has produced positive gross average tracking error over the measurement period. The fund’s average duration has closely tracked the benchmark duration over its history.
     

    Short-term investment grade

    Historical annual tracking error for investor and admiral shares.

     

    Intermediate-term investment grade

    Historical annual tracking error for investor and admiral shares.

    Long-term investment grade

    Historical annual tracking error for investor and admiral shares.

    About

    Barry Barnitz, administrator of both the Bogleheads® wiki and of Financial Page, a Bogleheads® blog

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Posted in Bonds, Market statistics
March 2017
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