Morningstar

3 Super Risky Low-Risk Funds

If you look at risk from one dimension, you might miss the big picture.

3 Super Risky Low Risk Funds
Securities in This Article
Vanguard Extended Duration Treasury Index Fund ETF Shares
(EDV)
Vanguard Long-Term Bond Index Fund Admiral Shares
(VBLAX)
iShares 20+ Year Treasury Bond ETF
(TLT)

Russel Kinnel: If you look at risk from one dimension, you might be missing the big picture. Long-term bond funds with high-quality bonds sound pretty low-risk. And, in fact, many have little credit risk. However, some people have said long-term Treasury ETFs are low risk because of course the federal government is a very low credit risk.

But these funds carry a lot of interest-rate risk. Treasuries pay lower dividends than other debt of similar maturities because of their low credit risk, but that actually means they have more interest-rate risk because their lower yields provide less to make up for declines in principal.

3 Super Risky Low-Risk Funds

  1. Vanguard Long-Term Bond Index VBLAX
  2. iShares 20+ Year Treasury Bond ETF TLT
  3. Vanguard Extended Duration Treasury ETF EDV

There are a couple of ways to understand this risk. First, check a fund’s duration. That’s a measure of how much interest-rate risk a fund has. The whole bond market has a duration slightly under 6.0 years right now, so any duration figure above 6.0 years suggests a lot of interest-rate risk. Vanguard Long-Term Bond Index has a very low credit risk rating of AA- for its portfolio but a huge duration of 13.7 tells you it’s actually riskier than most bond funds.

The other way to get a handle on interest-rate risk is to simply go over calendar-year returns with a particular focus on 2022 when interest rates popped higher. That same Vanguard fund lost 27% in 2022.

IShares 20+ Year Treasury Bond ETF, ticker TLT, lost 31.4% in 2022, and Vanguard Extended Duration ETF EDV dropped more than 39%. So, no, I don’t think these funds are low-risk.

Most investors don’t need funds like these as generally we want bond funds to serve as ballast for equities. However, you can use these funds effectively if you have your eyes open to the downside. If you have a bond portfolio that is heavy on the short end, you could use funds like these to provide a little exposure to the longer end of the yield curve. But I would limit them to maybe 2% of my portfolio so that a year like 2022 won’t torpedo your whole portfolio.

Watch 3 Thrilling Funds in My Portfolio for more from Russel Kinnel.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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