Episode 90, Vanguard's Perryne Desai discusses fixed income concepts and investment strategy, Rick Ferri host

13:26Rick Ferri:Yeah, absolutely. So let's stay in U.S. taxable because even that is pretty broad. Let's start with the big sub-asset classes. You have treasury bonds that are issued by the U.S. government. You've got mortgages. You've got corporate bonds. You've got inflation-protected securities. You've got high yield. So the aggregate bond index is comprised of everything that I just mentioned except for inflation-protected securities and high yield. The aggregate index, which is what total bond tracks, began life in the 1970s before things like the inflation-protected securities market really came to the fore before high yield became indexable or even EM.

14:06I would

14:07Rick Ferri:say the aggregate bond index is a really diverse, really complex market. So when you look at our total stock market ETF, VTI, there are about 4 ,000-ish stocks in the portfolio, where there are 13 ,000-ish in B &D. So their complexity sort of grows as you include various asset classes.

14:32Perryne Desai:If people want to better understand where the aggregate bond index came from and Vanguard's role in creating a total bond market index fund and the history of that, because it wasn't even allowed to be called an index fund when it first came out. I did a podcast with Nick Gendron, the global head of fixed income product management at Bloomberg, which is the index side of the aggregate bond, and Josh Barrickman, the principal and senior portfolio manager and head of fixed income indexing in America on the Vanguard side as to how they track that index. And it was an interesting podcast. It was podcast number 45.

15:19Rick Ferri:Oh, that's cool. I have to go back and find it.

15:21Perryne Desai:Yeah, it was really an interesting podcast. It really was. Because they talked all about, should we include tips? Should we not include tips? Why should we include them? Which is what the index provider wanted to do. Why they weren't included, which is what the licensees of the index wanted. So it was really interesting to see the development of that index and how it's changed over time. Anyway, so let's now move to the tax-exempt side of the bond market, which would be municipal bonds. Sure.

15:57Rick Ferri:Municipal bonds are really interesting. It's about a four trillion dollar market today. Muni bonds are issued by state, city, and local governments. They are generally exempt from federal taxes and can also be exempt from state and local taxes, assuming you live in that state or locality. So that's the benefit in and of itself. Taxes and fixed income distributions are often taxed at ordinary income. Those taxes start to matter, particularly as you climb up that marginal tax rate ladder. I am not a tax expert. We'll start to push the bounds of my abilities here pretty quickly, Rick.

16:37Perryne Desai:Okay, fair enough.

16:38Rick Ferri:What I would say is muni bonds are really great for a lot of investors. It's not just for people who are at that top marginal tax bracket.

16:47Perryne Desai:Agreed.

16:48Rick Ferri:The yield curve on municipals is so much steeper than the yield curve on treasuries that you actually benefit from investing in municipal bonds as you go out on the curve. So as you take on duration, you benefit even at lower tax rates because the marginal tax exempt yield that you are earning is so much higher than, you know, what you would earn otherwise for a similar sort of credit risk.

17:14Perryne Desai:You know, we're going to get into the risks in a second, but that has been so true as I look at various maturities of municipal bonds, noticing that the yield curve has maintained its steepness in the muni market, whereas in other markets it did not. But getting into these technical terms, I do want to start talking about the risks of all bonds. There's a lot of different terminology out there, and it's going to take a little bit to explain it. Interest rate risk, which is also term risk, inflation risk, credit risk, prepayment risk, called call risk. So explain all these different risks that are in the fixed income market in general.

17:56Rick Ferri:Sure. I would probably give you three primary risks. The first is that of interest rate risk, and you can measure that using duration. That's a term that you will hear often when thinking about fixed income. It basically tells you how sensitive your bond is to a given change in interest rates. The larger the duration, the more sensitive your bond is. Think about our earlier example of lending each other money. If you're lending to someone for 10 years versus three years, there's a pretty good chance you're taking on greater risk. So duration is a measure of that interest rate sensitivity.

18:32Perryne Desai:So that's a good explanation of duration. Thank you. But I have a question about duration. And it is sometimes people say things like duration will tell you how much percentage wise a bond will move up and down in price based upon a 1 % move in interest rate. That's right. Given a five-year bond, if it has a duration of three years and interest rates move up to 6 % from 5%, I should expect the market value of my bond to fall by about 3 % because the duration is three years. Is that fairly accurate?

19:18Rick Ferri:Yeah, that's fairly accurate.

19:20Perryne Desai:There's another term out there that people hear once in a while, and it's called convexity. Yep.

19:26Rick Ferri:I'm going to back us up just a little bit because call risk helps you think about convexity. So call risk occurs when you have options embedded in your bonds. Most often we see that in mortgages and munis. So convexity starts to show up because it measures the sensitivity of being in the money or out of the money on that call option. So think about a mortgage. If you've locked in, say, a 5 % mortgage on your house and all of a sudden 30-year rates are dropped to 3 % again, I'd want to refinance that mortgage and take out a 3 % one instead. Hopefully other people would too. And then in aggregate, as mortgages do this, these bonds become more sensitive than their duration would suggest to interest rates.

20:09Rick Ferri:So convexity is sort of your extra sensitivity to being in or out of the money on the call option that you actually have as a homeowner on your mortgage.

20:19Perryne Desai:Sometimes those options don't seem to be accurately priced to me, meaning there seems to be a whole lot more risk in buying somebody else's mortgage at 6%, knowing that they can refinance and call in their loan anytime they want. I should get paid a heck of a lot of money for that, but it doesn't seem like I'm always getting paid enough for that risk. What do you think about that?

20:50Rick Ferri:I think this is a great opportunity to have a really strong asset manager on your side, Rick.

20:59Perryne Desai:Good answer. All right. Fair enough.

21:01Rick Ferri:I've gotten a chance to sit with both our active and indexed sides. We have, you know, an active rates team. They focus very heavily on mortgages. We have indexed products like VMBS. We have, you know, mortgages show up all throughout our lineup. And what is really interesting is how people think through prepayment risk, that risk of you calling the mortgage faster than I would anticipate. Yes. Maybe I pay too much for that bond. So they go deep into really trying to understand the locality of the mortgages that underpin our mortgage bonds. They go deep on trying to understand the tranches of the various rates and durations of those structures.

21:49They go deep on trying to understand how the mortgage industry operates. So they'll look at the housing market.

22:00Rick Ferri:They'll look at the various movements of various housing markets across the country. and they will roll that up into how we think about each and every mortgage bond in our portfolio. When I was in fixed income in my first job out of college, I was learning about prepayment tables. And there's this company out there, I'm sure they still exist, called Andrew Davidson. And they were like the preeminent prepayment calculator. so they had all these prepayment rates by 15 year, 30 year, various states, etc. And I wanted to learn more about mortgages. I walked down to their offices in Soho one day. It was hot and sweaty.

22:47Rick Ferri:And I picked up perhaps one of the few copies that they allow to be published because you can only get it at their office and learned prepayment tables the old school way. I admit that is a long time ago and most of that knowledge is lost, but I still have the workbook somewhere at home.

23:03Perryne Desai:Let's talk about municipal bond prepayment risk because Vanguard has a few municipal bond funds that are longer term.

23:10Rick Ferri:Yes.

23:11Perryne Desai:And the high yield municipal bond fund has a fairly long duration. But I used to manage municipal bond portfolios and almost every municipal bond offering by a municipality that has maturities more than 10 years have a call feature. When we're looking at something like a yield to maturity of the portfolio, which you can find on a Vanguard website, you look at any of the bond funds and you go down to the characteristics and it'll say yield to maturity, which I'm going to get into in a minute about the difference between that and SEC yield. And when there's a call feature on a bond, there's a different kind of a yield called yield to worst, which is different than yield to maturity.

23:56Perryne Desai:How do I use that? But I like to use, when thinking about any kind of bond, the yield to worst.

24:04Rick Ferri:There are three sort of yield to somethings out in the market. There's a yield to call, there's a yield to maturity, and there's a yield to worst. Generally speaking, the yield to worst, it'll take into account the option value that exists within your bonds.

24:20Perryne Desai:Option meaning call features.

24:21Rick Ferri:The call option, right. Right. So it'll either show you the yield to maturity or the yield to call, depending on the current value of your call. So it's sort of like your worst case scenario.

24:32Perryne Desai:Is yield to call and yield to worst the same thing?

24:34Rick Ferri:Not necessarily.

24:34Perryne Desai:If your option is out of money, so the bond will not be called, then your yield to worst will actually show you your yield to maturity. I see. As a bond investor, what is SEC yield and should I be using that when I'm trying to figure out what my expected return is on this bond fund? Or should I be using yield to maturity or yield to worst if that's what's showing up?

25:01Rick Ferri:We have a great article on our website. I can give it to you for your show notes.

25:06Perryne Desai:Sure. I'll add a link in the note.

25:07Rick Ferri:The simple explanation I would have is the SEC yield is a standardized calculation. So it's a good way to compare apples to apples yields across various providers. When I think about if I look at Vanguard's lineup, I like to use the yield to worst in thinking about my total return. Because it'll help me think through sort of the long term. If I were to hold these bonds to their worst option, whether it is a call or maturity, Like what what am I likely to receive by holding these to maturity or to call?

25:43Perryne Desai:So I agree with you, by the way, and I often talk with clients when I'm looking on a particular bond. The clients will sometimes come to me and say the SEC yield is four percent on a fund. Ten year treasury at the time might be five. and I say to them well that's because the coupons within the bonds that are being held in the portfolio have lower coupons because the bonds were bought during this period of time when interest rates were low so the SEC yield which is simply the cash flow coming off of the fund is only four percent but if you want to get an idea of what you should earn from the portfolio you have to go further down on the website to the characteristics of the portfolio.

26:30Perryne Desai:And there you'll find yield to maturity, which I believe Vanguard uses yield to worst.

26:36Rick Ferri:We do.

26:36Perryne Desai:Right. So you go down to the bottom, you look at yield to maturity. That's going to give you a better indicator and also even a better kind of apples to apples comparison to other bond funds of what you should expect as a rate of return. That SEC yield, depending on how volatile interest rates are and whether we have a big move up or a big move down, can be misleading.

26:56Rick Ferri:I think misleading is difficult to say about a regulated yield.

27:02Perryne Desai:I got you. Let me reword it. Kind of gather the wrong information if you're trying to do a comparison, I think, of what your expected return will be if you're using SEC yield. I think it's better to use yield to maturity.

27:15Rick Ferri:Yeah, that's why I think if you're comparing two products like us versus one of our competitors and you want to understand what is the product currently yielding right now, the SEC yield is a good way to compare apples to apples within a certain category. As you then start to expand, like, how should I actually think about this product and what should I as a shareholder of this product receive? That's why I like yield to worst.

27:43Perryne Desai:Let's talk about another thing called current yield. And let me tell you a story. So I was in the brokerage industry back in the late 1980s, early 1990s. And I was talking with the client and a bond that I was showing this client, it was a municipal bond. I said to the client, this municipal bond has a yield to maturity of 4%. And he said, let me think about it. He calls me back like an hour later. He goes, you know, I talked to my other broker and I can get that exact same bond with a current yield of 5%. I said, well, hold on now. We're talking about two completely different things between yield maturity and current yield.

28:29Perryne Desai:So let's explain what current yield is.

28:31Rick Ferri:Current yield tells you the return you could expect if you bought the bond and held it for a year. but it doesn't reflect the actual return you'd receive until the bond, if you had held the bond to maturity, say. So it's really only a one-year look.

28:46Perryne Desai:So if the bond had a high coupon, but because it had a high coupon, it was returning capital to you, you're paying a premium for that bond. So when it matures, you're only going to get par value. So you're going to lose money in the end. I don't mean lose money. If you bought the bond at 110, it's going to mature at 100. So you've got this decline in market value that's going to occur between the time you bought it and the time it matures. So that is a loss.

29:15Rick Ferri:Correct.

29:15Perryne Desai:But it's this combination of higher coupon plus gradual loss in market value to get to par to maturity that gives you your total return. But that's not that extra$10 loss at the end is not computed in current yield. So in my scenario, that other broker was being dishonest. So therefore, the current yield is overstating or understating what the expected return or the horizon yield, again, another yield out there, is going to be of the fund.

29:50Rick Ferri:I think that's fair. I would probably say when you are buying that high coupon bond, you are buying it at a premium. And so what you're in essence doing with that premium is you're amortizing it down, just like a car. You would amortize that over time or equipment. down to its par value at the end of its life, because that's what you're going to receive at the end. So when you are amortizing a premium, that's sort of a negative number relative to your coupon. When you are amortizing a discount or accruing a discount up to par, that's additive to your yield. So again, it all comes back to that bond bath.

30:25Perryne Desai:It all works out to a yield to maturity or yield to worst. So that's what I think people should use to determine expected long-term return from a bond fund. I'm going to switch gears in here again. Let's talk about credit risk. So can you describe what credit risk is?

30:43Rick Ferri:Credit risk is basically thinking about the likelihood of default, right? Are we ever concerned that a company can't pay, company or government can't pay its debt? What I really like about municipalities is they, generally speaking have higher credit ratings than other sub-asset classes and have historically fewer defaults.

31:05Perryne Desai:That's very interesting by the way. I noticed that it's like one quarter the number of defaults for the same credit rating as say corporate bonds. So it's different. But go ahead. I'd mean to jump in.

31:19Rick Ferri:Yeah it's different because you know a corporation there's only so much debt they can take on before their capital structure starts to look pretty scary. Whereas municipalities have levers, like raising taxes on their population, that gives them the ability to service their debts. They also have guarantors at certain levels, right, where I live in the great commonwealth of Pennsylvania. My municipality might have an opportunity where, you know, the municipality goes bust or issues too much credit or, you know, too much debt. So there are, in essence, like backstop obligors for certain municipalities that makes them less prone to that default risk.

32:05Perryne Desai:Well, the interesting thing about municipals is that, you know, a city cannot go out of business and, you know, just dry up and go away like a corporation can. Right. I mean, you still have to have schools, you still have to have water, You still have to have utilities, still have to have roads. So it just can't go away. Counties bail out cities. States bail out counties. Federal governments bail out states. Even though it's comparable in an A-rated corporate to an A-rated muni, in my own view, I always looked at the A-rated muni as being a better credit rating from the sense that it has less chance to default than the A-rated corporate because the A-rated corporate, that can just go away.

32:46Rick Ferri:That's an interesting point, Rick. I haven't necessarily thought about it in that way. A credit rating is designed to take all of that into consideration. But I would say, generally speaking, municipals skew toward higher quality, where corporates have more of that longer tail distribution toward the higher yield part of that credit.

33:08Perryne Desai:One more thing on nomenclature before we go into how do you use bonds in a portfolio? And that is, what's the difference between a cash equivalent, a note, and a bond?

33:20Rick Ferri:It's all about sort of its maturity profile. So a cash equivalent will be a relatively short-term bond. Notes and bonds tend to be more in treasury land.

33:30Perryne Desai:Okay.

33:30Rick Ferri:So notes tend to be the shorter end of the curve, bonds are longer end of the curve.

33:35Perryne Desai:One year or less, it's a cash equivalent. If it's between one year and 10 year, it's a note. And if it's over 10 years, it's a bond. And that's sort of what I learned, and I don't know where. I believe you're right. It's treasury land. Now let's go into uses of bonds. There are many different uses for bonds. Why don't you describe, in your own words, what you see the uses for fixed income? Let's just not call it bonds because mortgages are not bonds, but they're fixed income. So uses of fixed income. Again, here is a period of time when the stock market has just done fabulous, and I'm getting a lot of questions about, should I even have any bonds in my portfolio?

34:20Perryne Desai:So I'd like to hear your views on this.

34:21Rick Ferri:Sure, happy to. I think about fixed income playing two primary roles. First, it acts as ballast against equity market volatility. So it's a great pairing for clients who want to protect against that downside risk of your equity markets. One of the ways it plays that role is having a different return pattern than equities. So in essence, lower correlation creates times when when the equity market goes down, perhaps the fixed income portion of your portfolio remains stable.

34:50Perryne Desai:I want to stop you for a second. You said perhaps, perhaps.

34:54Rick Ferri:Not always true. Not always true. We've certainly seen that in recent memory. But more often than not, having that protection provides downside protection risk. So if you are a retiree, you are living off of your portfolio, having a portion of your assets in fixed income will more often than not help protect you from that downside risk in equities. It makes sure that your drawdown overall does not impact the way that you live your life. The way it creates that lower correlation is having exposures that are different than the equities market. So when you think about the equities market, it's all corporations that have gone public, whereas the fixed income market, as we just talked about, is a lot more varied.

35:41Rick Ferri:That is the first sort of section that I would talk about. The second role it plays in a portfolio is income generation. So I recognize, again, we've hit a period where we have lived through extremely low interest rates and then quite a big jump in interest rates. It still holds, particularly now that while investors are aging and they need income to replace your wages because you want to retire and go live on a beach somewhere, or maybe that's just me, you want something to be able to replace that wage. You need something to replace your income. We now have income back in focus because yields have risen.

36:22Rick Ferri:So even though rates are starting to come down, right, and the Fed is starting to cut those rates or has been cutting rates for some time, you've still got a meaningful coupon, which means that you have a meaningful yield.

36:34Perryne Desai:You've given us two. I'm going to give a third. So you've given us it's not equity, meaning it's a different return path usually. The second thing is income generation for, like you said, retirees. But I'm going to give you a third one, and it's called liability matching. Simply, I know I have a liability out there. Let's say I'm going to buy a vacation home in five years, and I want to have the money, or I have the money available to do it now, but I want to make sure I absolutely have the money available five years to buy that vacation home. So instead of putting it into equity, I put it into a fixed income product where I know what the value is going to be.

37:12Perryne Desai:In other words, I match my personal liabilities to my portfolio. So if I have shorter term liabilities, I buy shorter term bonds or shorter term bond funds. And if I have longer term liabilities, I buy longer term bond funds. And I often tell people who are retiring that probably a 10 year bond allocation to your spending is not a bad idea when you're retiring. Because if you get a downdraft in the equity market, you know, a lot of people don't like to sell equity when the market's down. so you have this 10 years worth of fixed income in your portfolio when you retire, where you could draw down on the bond side during that period of time.

37:49Perryne Desai:So that would be my third one.

37:51Rick Ferri:Yeah, I mean, look, I love liability matchings. Many of the clients that I've spoken to are saying, I want to put this money to work so that it will come back to me when my kid's tuition is due for college, or I want to be able to put a down payment on a house. Recently, and I'm really excited about this, We've announced that we will launch corporate target maturity ETFs. The A filing just came out, so we're hoping to launch in late Q1. But these are ETFs that can act as a liability matching tool for investors.

38:25Perryne Desai:Well, you stole my thunder there.

38:27Rick Ferri:Oh, no.

38:29Perryne Desai:That was my next question.

38:31Rick Ferri:You can just dub right over me. Just delete it.

38:34Perryne Desai:That's exactly right. A lot of people use zero-coupon bonds or had been using zero-coupon bonds, where they know that at a particular time when the bond matures, you're going to have exactly the par values. Bought a five-year zero-coupon bond and you paid$75 ,000 for it, but there's no coupon paid. Five years down the road, it's going to be worth, let's say,$100 ,000. You know exactly what it's going to be. Right. Now the fixed income market, the products out there have gotten even a little more interesting than that. And because you could be using corporate bonds in these new target maturity funds that do the same thing.

39:16Perryne Desai:They mature on a certain date. But because they're not all treasuries, you're able to pick up a little bit better yield. Is that how it works?

39:24Rick Ferri:That's right. That's how it works. So a lot of our clients in the past, they don't just use treasuries. They use municipal bonds. They use corporate bonds. And when you are investing in an individual bond and you're creating this liability matching program for yourself, it can be sometimes disadvantageous because you don't have the diversification. You are taking on a ton of risk associated with those individual names in your portfolio. Maybe not the treasury, but in corporates and munis. And so the corporate target maturity ETF is designed to give you as much of that almost bond-like performance in that it will mature at the end of its life cycle.

40:09Rick Ferri:So if you're investing in a 2030 target maturity ETF, it will liquidate in 2030. But you're getting the exposure to all of the corporate bond universe that is going to be maturing in 2030. So you have broader diversification. You actually can increase your yields and you have the ability to do it at a low cost. So when clients are doing this with individual corporate bonds today, that's really hard to get right from a transaction cost perspective. You're paying through the nose for spreads because you're trading in small size.

40:47Perryne Desai:Yes. Always a problem.

40:48Rick Ferri:Always a problem.

40:49Perryne Desai:Maybe not so much with treasuries, but corporates and municipals, the spreads on those can be quite large.

40:55Rick Ferri:That's right. But here in an ETF wrapper, you're getting the broad diversification. You're getting access to all of this with an ETF-like spread.

41:05Perryne Desai:Let me ask a question about your offerings. Are they just corporate or are you doing municipals also?

41:13Rick Ferri:For now, it is just a corporate suite. We're keeping an eye on municipals as we think about Vanguard product development. Do you mind if I go on a tangent, Rick?

41:23Perryne Desai:That was really the idea for my question, you know, indirectly, is for you to go ahead and go off on this last thing called the future, which is simply, you know, where are you going with all this?

41:33Rick Ferri:Well, so I actually, I would anchor you to Vanguard's product design principles. These are the principles by which Vanguard launches any product globally. They are designed in four ways, and they're always thinking about how we can best serve clients, meet their investment needs, and set them up for investment success, right? We start with the investment case. Is this investment, is this product that we're trying to launch going to be designed effectively with an economic rationale and broad diversification? Then we have the client case. The client case is really designed to help us think about, are our clients going to be well-served by having this product?

42:17Rick Ferri:How are clients going to use this in a portfolio? How are they going to invest over time in these? And are we best meeting our clients' needs? The third is the business case. Can we come in and offer a Vanguard-style product? Can we do it at a low cost? Can we gain scale effectively? Can we offer a differentiated service to investors by offering this product? And finally, it's feasibility. It's like, can we do it operationally? Do we have all the right people in place? Legally and regulatorily, is there anything that we need to think about? Those are our product design principles. And so every time we look at a product and our senior staff, you know, reviews our product designs, they are thinking about those four principles.

43:02Rick Ferri:So I love the idea of a municipal target maturity ETF lineup. Do I have one yet? No, because we're thinking through all of those things and all of those issues.

43:12Perryne Desai:A couple of other questions here on product. I've never been adverse to people putting some corporate high yield bonds in their portfolio. And I always love the Vanguard corporate high yield bond fund, but it's an actively managed fund that really done a great job when you look backwards. It's been around for a long time. But that's it. That's all you have, that one fund. I mean, there's no index fund. There's no ETF.

43:41Rick Ferri:Well, actually, we do have an ETF. We just launched VGHY last year.

43:45Perryne Desai:Oh, well, tell me about that.

43:48Rick Ferri:Absolutely. It is fully managed by our Vanguard fixed income team. The portfolio manager is Mike Chang. Frankly, we launched the ETFs because you see the rise of ETFs, you see the rise of active ETFs. There are now more active ETF products than there are index ETF products. And we recognize that clients want to be served in a whole bunch of different ways by Vanguard and our peers. They want an active ETF and a mutual fund and an index fund. They want the ability to choose their manager. They want the ability to choose their wrapper. And so we want to come and offer broad access to best in class portfolio managers, asset classes, and performance.

44:29Rick Ferri:And so we launched VGHY last year to be able to do all of those things.

44:34Perryne Desai:And I'm looking at that now, just looking at it, same expense ratio, fixed income characteristics, a lot more bonds in the regular high yield bond fund than the ETF. Maturity and duration look fairly similar, so fairly comparable to the existing Vanguard high-yield corporate bond fund.

45:02Rick Ferri:Yeah, I would say there's probably two key characteristics I would call out. One is the existing Vanguard fund has been around for much longer and was managed by Wellington solely for quite a number of years. I would say the The multi-manager design structure is different than the ETF, which is solely managed by our fixed income team here. We expect to have more bonds in a much longer tenured fund than we would in the ETF, which just launched. What I would say about the ETF is it's also slightly different in terms of design. So the benchmark for the fund is a higher quality benchmark. You would note that we have a much broader benchmark for the ETF.

45:45Rick Ferri:the strategy itself and like what our portfolio managers are doing every day isn't all that different but we're giving the portfolio managers more access to the lower quality part of the universe where selection really plays an important role in alpha generation

46:04Perryne Desai:why don't you just launch let's say a short-term high-yield bond index fund like iShares has iShares zero to five year high yield corporate bond ETF.

46:16Rick Ferri:S-H-Y-G.

46:18Perryne Desai:Why haven't you go down the road of indexing high yield bonds?

46:22Rick Ferri:I thought this was a Vanguard oriented podcast. You guys are boggle heads. I'm kidding.

46:26Perryne Desai:No, that's actually, well, we can correct you there. We're all about low cost, you know, low tax. Live below your means. I mean, we'll go anywhere. We'll go to Vanguard. We go to iShare. We go to wherever, wherever.

46:41Rick Ferri:Just kidding. I was just making a joke.

46:43Perryne Desai:Well, we're trying to keep you honest over there at Vanguard, you know.

46:46Rick Ferri:Totally fair. You know, that was going to be my question for you was like we are consistently trying to listen to clients and better meet their needs. So I can't comment specifically on index high yield or short term index high yield product. But is that something you and your listeners would want?

47:06Perryne Desai:Probably most of them really don't care about high yield corporate. I mean, it's just something that I always had an interest in. And, you know, higher quality, high yield, like double B rated, single B, and then not getting into the C range, which gets to be more like equity. I've always said having a small portion of your fixed income portfolio in high yield kind of rounds out a total bond market. Because if you think about it, as we talked about, the total bond market doesn't have tips, doesn't have high yield. So if you actually want a total bond market exposure in your portfolio, you need to add a little bit of tips and you need to add a little bit of high yield.

47:41Perryne Desai:So what's available out there? And what's been available out there is basically the Vanguard fund, which is great. But not everybody has access to that fund, especially if they're at some other brokerage firm.

47:50Rick Ferri:Can I name drop you another one?

47:52Perryne Desai:Sure, go ahead.

47:53Rick Ferri:We talked earlier about the aggregate bond index and how it's been around for a long time. As certain parts of the market become more accessible to indexing, they become more approachable, let's say. The index providers out there, like the Bloombergs, the ICES, the S &Ps of the world, they're all looking at ways in which they can continue to index these asset classes. And then asset managers create index products against them. It's a really cool cycle of growth and innovation and almost democratizing access to less liquid parts of the market. We actually just recently launched BNDP in December.

48:32Rick Ferri:It is our Core Plus Index product. It's managed against the U.S. Universal, which has exposure to high yield and EM in an all-in-one index wrapper. So we do technically index a little bit today in high yield.

48:46Perryne Desai:Interesting. So it adds high yields in emerging market. It doesn't have tips. So you would need to add that element to it if you wanted to get sort of a true total market portfolio. And why would EM be in that portfolio, by the way, emerging markets?

49:01Rick Ferri:So emerging markets is actually part of it's a normal and pretty standard part of the higher yielding fixed income subasset classes.

49:11Perryne Desai:In the United States?

49:12Rick Ferri:In the United States.

49:13Perryne Desai:Through Yankee bonds, correct?

49:15Rick Ferri:Yeah, these are Yankee bonds. These are bonds issued by governments and corporations, you know, in emerging markets that issue here in the U.S.

49:25Perryne Desai:The total bond market, the aggregate bond market index, has Yankee bonds in it, but it's for developed markets only. So what you've done here is you've added emerging markets.

49:35Rick Ferri:That's right.

49:36Perryne Desai:See, I know a little bit about bond indexing.

49:38Rick Ferri:You know a lot more than you give yourself credit for. Okay.

49:42Perryne Desai:Last words on where you're going at Vanguard and what to look for in the future.

49:47Rick Ferri:I think what's really great about the evolution you've seen in Vanguard's approach is we continue to think about the ways in which we can serve investors in more and differentiated ways. And so the products that you see us coming to market with, the innovation that you see across both our product lineup, our advice offering, our website design, we're all trying to meet our clients where they are. And sometimes that might mean that we are launching more narrow strategies across the complex because we have a huge advisor base and they're really interested in slicing and dicing the universe more and more narrowly.

50:28Rick Ferri:Sometimes that might mean we're launching products like a BNDP that have big, broad exposures to the various sub-asset classes. And sometimes that means products like the target maturity ETFs that are coming out in late Q1, where there is an existing client need. Clients want to be laddering in portfolios, and we want to help meet them where they are. And so we're trying to find new ways to deliver great outperformance for active products and very tightly tracking index products to our investors so they can meet their investment objectives.

51:06Perryne Desai:From us to you, what I think would be really helpful, as we already discussed, are target date municipal funds. I think that would be very interesting and helpful out there. So a lot of people use munis to target liabilities. You know, high net worth people who are going to buy a vacation home or pay for a wedding or, you know, they have something going on. Or maybe they just want to ladder target maturity munis in their personal portfolio because they want to make sure they have enough money coming in every year to meet their retirement goals. And they're in high income brackets. So that would be a really useful product, I believe.

51:46Rick Ferri:I love that.

51:46Perryne Desai:But thank you so much for your time today. We've covered an awful lot. And I appreciate you being on Bogleheads on Investing.

51:53Rick Ferri:Thank you so much for having me.

51:56Perryne Desai:This concludes this episode of Bogleheads on Investing. Join us each month as we interview a new guest on a new topic. In the meantime, visit boglecenter.net, bogleheads.org, the Bogleheads Wiki, Bogleheads Twitter, the Bogleheads YouTube channel, Bogleheads Facebook, Bogleheads Reddit. Join one of your local local heads chapters and get others to join. Thanks for listening.