Summary: This is a very low risk fund with a low fee. It holds only Treasury Bonds with short average maturities. If you need a place to store cash for a few weeks or a few months, this is a safe and boring place to do so.
Commentary: We hate recommending this fund. The SEC yield is a paltry 0.32%. This is not a reflection on the management of the fund (its an index fund which captures the performance of the short-term 1 – 5 year Treasury Market) but, a reflection of the current low-yield environment. You can earn a much better yield by plunking your money into a one-year CD. (View CD rates here)
Assuming you have a good reason not to put money in a CD, this is a good safe choice. Your loaning money to the US Government, so there is no credit risk.
If interest rates rise, this fund will lose a little bit of money, but not much. The Fed has indicated that they intend to keep rates low until 2015, which means rates are unlikely to trade more than a half percent higher than current levels. Assuming rates move up by half a percent, the fund would lose about 1.1% in value. However, the yield on the fund would be increasing while the value of the fund dropped. So, the fund would pay a half percent more in yield.
Over the course of a year, the fund’s total return would only drop by 6/10ths of a percent as a result of a half percent rise in interest rates. In other words, this fund is fairly well protected against interest rate risk.
Fees: Excellent The annual expense ratio is only 0.20%. If you have $50k to invest and buy the Admiral shares, it goes down to 0.10%.
Tracking: Average The bond index which its tracks contains over 700 bond issues. However, the fund holds a little over 100 bonds. As a result, the Vanguard Short-Term Federal Fund has a duration of 0.4 years less than the index it tracks. Over the last year, that has lead to the fund outperforming the index by over 0.3%, but could just as easily lead to underperformance.
Liquidity: Excellent It trades short-term treasuries which are some of the most liquid securities in the world.