Vanguard and Fidelity each launch pricier [for them] funds -- extra junky junk bonds and futures -- that wealth managers prefer to farm out
The Malvern giant already has a 'junk' ETF, but more constrained than this one, and Fidelity's new futures ETF looks to a brighter future, after a slow start
5 min read
Brooke's Note: Financial products are nothing but packaged knowledge. But the knowledge, wrapped and bundled, has sure gotten commoditized, hence marginalized. Necessity is mothering invention as RIAs vault toward $10 trillion and their needs come into focus, with inventive products being put onto shelves. Of course, that hardly means RIAs asked for them or that they will fly off the shelves, as the Fidelity futures ETF in this article may indicate – never mind all those private/public ETFs going begging. But it seems like they could solve a problem for RIAs. As they scale, they will need to outsource, and ETFs increasingly look like a way to do more of that when it comes to keeping up with the needs of sophisticated high-net-worth investors.
Vanguard Group is launching a second, potentially higher-risk – and higher-yield – junk bond ETF to fill a “glaring hole'” in its product line-up for high-net-worth RIAs and retail investors.
The high-yield ETF launch fits the wealth-centric strategy of new CEO Salim Ramji, and new wealth management head Joanna Rotenberg, who intends to make Vanguard's wealth unit more attractive to high-net-worth (HNW) investors. See: Vanguard completes shakeup with outsiders Salim Ramji, Joanna Rotenberg supplanting firm lifers.
In a 2025 letter to investors, Ramji identified active bond funds as a growth opportunity, and HNW investors expect diversified portfolios to include some riskier, but higher-return fixed-income products.
“A junk bond ETF has been a glaring hole in Vanguard's lineup,” says Jeff DeMaso, editor of the Independent Vanguard Advisor newsletter, in an email exchange.
The Malvern, Pa., fund shop will launch its High-Yield Active ETF (VGHY) in September at 22 basis points. It charges seven basis points for the average ETF.
Vanguard is also taking the brakes off its new fund, stripping away the 20% junk cap that limits Vanguard's similar, but more restrained high-yield Vanguard High-Yield Corporate Fund Investor Shares (VWEHX)*.
Holding the bag
“There are different levels to the junk bond game. Vanguard’s VWEHX tends to take a more conservative approach … if I had to guess, the new ETF will be more aggressive," says DeMaso
‘Junk bonds’ – debt rated lower than BB – might have an unflattering name. But quality advisors can use them effectively – under the watch of expert bond managers.
The bonds – like corporate land sharks – not only produce a radically higher income stream; the poor credit rating underlying the corporate issuer can improve and generate significant capital gains for the bondholders.
Of course, junk bond issuers can get further distressed or go bankrupt and leave bondholders holding the bag on a worthless investment.
Lower fees
How much more return can investors expect – with any luck?
Vanguard's new fund "should outperform by around 2.3%,” says DeMaso,
The new fund will also likely undercut the current junk-bond market leaders, but offer similar returns, he says.
In fact, with fees of 0.22%, VGHY will launch at nearly half the 0.4% cost of State Street's high-yield SPDR Bloomberg High Yield Bond ETF (JNK); and BlackRock's 6.52%-yielding iShares iBoxx $ High Yield Corporate Bond ETF (HYG,) which charges 0.49%.
DeMaso also expects Vanguard's new ETF to readily beat the yield available through the firm's VWEHX mutual fund, which already yields 6.12% – 1.74% more than the 4.38% offered by Vanguard's Total Bond Market ETF (BND).
Instead, VHGY will probably match the yields of riskier funds like JNK, which yields 6.73%, DeMaso says.
Fidelity Futures ETF fizzles in its first month
Fidelity's bid to sell a new ETF to RIAs eager to reap the benefits of futures trading – without suffering the pain of futures trading – is off to a slow start.
The Boston broker-dealer and RIA custodian launched the Fidelity Managed Futures ETF (FFUT), June 5, so RIAs can hedge for higher returns in a downmarket.
But the high-fee – 0.8% – fund has yet to go off to the races, pulling in just $26.25 million of assets in its first month. Although high, its fee is below the category average of 0.88%, according to ETF Reference data.
FFUT, Fidelity's first-ever futures ETF, buys-and-holds undervalued stocks, bonds, currencies and commodities, shorting those it deems over-valued.
It “seeks to generate a positive average return over time, with the potential for especially attractive return during bear markets, [which] contrasts with protective options strategies that typically generate negative return on average,” says FFUT's portfolio manager, Roberto Croce, in an email exchange.
Other funds “could have higher reliability as a contractual tail hedge … [but FFUT is] an effective option for RIAs and retail traders who want to outsource certain requirements and responsibilities associated with being a Commodity Trading Advisor,” he adds.
Fidelity, which manages $111 billion of ETF assets and administers $15 trillion overall, declined to comment on how it views the fund's initial performance, or when it expects it to take off.
It also declined to provide a dollar sum for how much it seeded the ETF at launch.
* Wellington co-runs VWHEX; whereas Vanguard will manage VGHY without third-party support. VWHEX prospectus also states that it may not invest more than 20% of its assets in bonds with credit ratings lower than B, or the equivalent. VGHY's prospectus has no such clause.
* IMGP's managed futures ETF levies 0.85% in fees; iShares levies 0.8%; FirstTrust 0.95%; ProShares 0.75%; WisdomTree 0.95%; and Invesco 0.65%.
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