Vanguard Mutual Funds to Sell

Sell these Vanguard mutual funds if you ever want to profit

Aug 10, 2010, 3:00 pm EST | By Dan Wiener, Editor, The Independent Adviser for Vanguard Investors

#7 – Short-Term Treasury (VFISX)

I’ll put it right up front: When it comes to investing in Vanguard bond funds, you generally can’t go wrong with their short-term funds. Expenses are low, relative yields are high, and risk is minuscule. But although Short-Term Treasury (VFISX) did well in 2008, a combination of a recovering economy and reduced investor fear left Treasury funds in a somewhat precarious position. Short-Term Treasury was the only one to end 2009 in positive territory, with a 1.4% gain — the lowest of any of the short-term taxable funds at Vanguard. It could be worse if the Fed begins tightening rates.

I think a better bet is Short-Term Investment Grade (VFSTX). That’s my favorite Vanguard fund at the short end of the yield curve. Formerly known as Short-Term Corporate, it is extremely safe, produces steady returns and offers some diversification that the Treasury and Federal funds don’t.

The diversified portfolio responds to rising or falling interest rates less rapidly than Treasurys, meaning that it rises a bit slower when rates drop and falls a bit less when rates rise, since the excess yields protect investors and prices. Over time, a portfolio like this one will outperform a Treasury portfolio, as Short-Term Investment-Grade has.