One of the unique aspects of US citizens from recent history is that, apart from the Bidenomics fueled 17% cumulative inflation and the 48.6% cumulative inflation under Jimmy Carter, most of them have not experienced the rationing and Depression-aftermath scarcity that preceded World War II. The few citizens who have survived into their 90s and baby boomers on the older end of the range are perhaps the only ones who still remember actually living through that era.
People from that generation are, by and large, much more risk-averse than their younger peers and succeeding generations. With the Depression and WW II era deprivation and rationing seared into their memories, certificates of deposit have become a staple in many of their portfolios, even when their yields have not kept up with inflation. The notion of FDIC insurance protection is most frequently cited as a major reason – it allows the investors to sleep at night.
Nearly the functional equivalent of keeping cash inside a mattress, the CD is often derided for its low yields when compared to those of other investment-grade rated products. However, is this condescension truly justified?
Take, for example, the Vanguard Short-Term Corporate Bond Index ETF Shares (NASDAQ: VCSH) | VCSH Price Prediction. Its yield is unquestionably higher on paper, but sometimes the obvious can be misleading when digging deeper.
Vanguard Short-Term Corporate Bond Index ETF Shares
VCSH holds over 3,000 short-term, investment grade corporate bonds which are considered relatively safe for pension funds and other institutions.
Launched 11-19-2009, VCSH is an ETF that uses the Bloomberg U.S. 1-5 Year Corporate Bond Index and the Bloomberg U.S. Aggregate Bond Index as its benchmarks. As of last month, it held 2,922 different short term, investment grade (above BBB-) corporate bonds. It has a 4-star Gold rating from Morningstar. At the time of this writing, it has a 4.42% yield. Other pertinent details are as follows:
|
Net Assets |
449.18 billion |
YTD Return |
0.56% |
|
Yield |
4.42% |
1-Year Return |
5.05% |
|
Avg. Daily Volume |
5.38 million shares |
3-Year Return |
5.31% |
|
52 wk. Range |
$78.56-$80.26 |
5-Year Return |
2.37% |
|
Expense Ratio |
0.03% |
10-Year Return |
2.73% |
45.76% of the portfolio holds bonds rated “A”. 45.90% of the portfolio holds bonds rated “BBB”. In addition to US Treasury bonds, the largest positions that VCSH holds are in bonds under 5 years’ maturity that are issued by:
- Bank of America
- AbbVie Inc.
- CVS Health Corp.
- T-Mobile USA Inc.
- Boeing
Comparing VCSH With CDs
Although Bank of America may issue both a CD and a bond, the CD also has FDIC insurance, whereas the bond does not.
Certificates of Deposit issued by banks are basically IOUs from the bank issuer that guarantee the investor a fixed annual yield. Provided that the issuing bank is a member of FDIC, any account, inclusive of CD’s is insured for up to $250,000. The current FDIC 1-year rate is 1.52% and the average 1-year CD yield is 1.5%-2.0%, with certain top-tier CDs going as high as 4.0%.
Splitting the difference between 4.0% and 1.5% is roughly 2.5%, or 250 basis points. For that additional yield, VCSH comes with the following risks:
- Interest Rate: since VCSH holds corporate bonds, they are subject to its changes, and their values are usually individually predicated on a lower price and higher yield calculated in basis points vs. its nearest US Treasury Bond maturity benchmark.
- Income Risk: Corporate bonds are corporate debt instruments. If a company decides to refinance debt or decides to call bonds that VSCH may have in its portfolio, that can impact its dividend payout, at least for a short period. Additionally, as some bonds mature, replacing them with comparatively rated issues with a comparable yield might be more difficult if the bond market is stronger at that point in time.
- Credit Default: While the odds are extremely low that an investment grade bond will default, it can happen. For example, VCSH holds a sizable amount of CVS bonds. Omnicare, the CVS subsidiary handling prescription medications, filed Chapter 11 bankruptcy in 2025. Although it is a separate corporate entity, subsequent losses to Omnicare or other subsidiaries could put CVS in danger of a default, for at least one quarter. Additionally, if a company decides to offer a new bond issue, it could potentially result in a credit downgrade from Moody’s and/or S&P, which would cause current issues to be subsequently discounted in the market.
Bottom line – even if both the CD and the underlying bonds were both issued from Bank of America – if the investor wants the guaranteed income, albeit a lower yield, the CD will deliver it, either from the bank itself or from FDIC, if the bank were to be acquired, closed, etc. If the investor is open to a modicum of low-potential risk but thinks the extra 250 basis points, which is not insignificant, is worth it, than VCSH may be a higher income vehicle that still prevents sleepless nights.
Top Gaining Stocks
Top Losing Stocks