VCHY provides exposure to the riskier end of corporate credit where yields compensate for default risk. This ETF targets bonds rated below investment grade (BB+ or lower), offering yields typically 3-5% above Treasuries in exchange for accepting meaningful credit risk.
How It Works
The fund tracks an index of U.S. dollar-denominated high-yield corporate bonds with at least one year to maturity. It uses market-value weighting, which means the biggest junk bond issuers get the largest allocations. The portfolio typically holds 1,000+ bonds with an average duration around 4 years, rebalancing monthly to capture new issuance while maintaining broad diversification across distressed sectors.
Key Features
- Vanguard's rock-bottom fees make this the cheapest broad junk bond exposure available
- More diversified than active high-yield funds that typically hold 100-300 positions
- Captures the full high-yield universe including CCC-rated bonds that many competitors exclude
Risks
- Default risk is real — expect 3-5% of holdings to default annually, with recovery rates around 40%
- Can lose 15-20% in credit crunches as spreads widen and liquidity evaporates
- Duration of 4 years means a 1% rate rise knocks off 4% in price before accounting for yield
Who Should Own This
Best for income-focused investors who can stomach volatility and have at least a 5-year horizon to ride out credit cycles. Works as a 5-10% portfolio position for those seeking yield enhancement beyond investment-grade bonds. Not suitable for anyone who might need to sell during the next recession when high-yield spreads blow out.