Vanguard Launches Income Focused ETF With Higher Risk Exposure

Vanguard has introduced a new exchange-traded fund designed for investors seeking higher income and willing to accept additional risk. The fund, named the Vanguard Multi-Sector Income Bond ETF (ticker: VGMS), officially launched last week. It marks the firm’s latest effort to offer actively managed fixed income products that go beyond traditional core bond portfolios.

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Unlike many of Vanguard’s more conservative offerings, VGMS will target riskier areas of the bond market—most notably high-yield corporate debt. This decision may raise eyebrows, especially with lingering concerns about a potential economic slowdown. Still, Vanguard believes the fund is well-timed and ideally suited for today’s credit environment, where experienced management can help navigate volatility.

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Rebecca Venter, senior fixed income product manager at Vanguard, expressed confidence in the strategy. “We believe investors will still find this approach attractive, even in a somewhat uncertain economic backdrop,” she said. “Given the market turbulence we've already seen this year, we view credit markets as offering strong opportunities for active management right now.”

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Emphasis on Riskier Bond Segments

The VGMS fund distinguishes itself by allocating a significant portion of its portfolio to non-investment-grade debt. According to its prospectus, the fund may allocate up to 65% of its holdings to high-yield (or junk) bonds, which are issued by companies with lower credit ratings and, therefore, carry a higher risk of default.

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The fund is benchmarked against an index comprising 50% high-yield corporate debt, 30% investment-grade corporate bonds, 10% emerging market debt, and 10% asset-backed securities. While these allocations serve as a guideline, the portfolio will be managed dynamically, meaning actual exposures could shift based on market conditions and the portfolio managers’ assessments.

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“On average, you can expect those exposures, but since this is an actively managed strategy, it will change depending on market opportunities,” Venter explained.

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Targeting Higher Income

Though the ETF is too new to have a stated yield, Vanguard offers a mutual fund with a similar investment strategy that currently has a SEC yield of 5.51%. That figure gives a rough estimate of what investors might expect from VGMS as it matures. The fund also features a 0.30% expense ratio, which remains low by industry standards and aligns with Vanguard’s reputation for cost-efficient investment vehicles.

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The fund’s design reflects a strategic use of “below-investment-grade flexibility,” Venter noted, which allows managers to pursue higher yields than what core bond funds typically offer. In exchange for this additional yield, investors must accept the increased risk associated with lower-quality debt.

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Vanguard’s new fund enters a growing field of income-focused bond ETFs. Recent launches from other asset managers include the F/m High Yield 100 ETF (ZTOP), Polen High Income ETF (PCHI), and Thornburg Multi Sector Bond ETF (TMB). These new entrants signal rising demand among income investors seeking alternatives to traditional bonds or core fixed-income funds, especially in an environment where interest rates have remained elevated.

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According to Trade Algo, both the high-yield and multi-sector bond ETF categories have attracted net inflows in 2024, suggesting that investors are increasingly open to taking on more credit risk in search of higher returns.

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While the income potential from high-yield bonds is appealing, it’s important to recognize the volatility that can accompany these assets. Junk bonds are more sensitive to market disruptions, and their prices can fluctuate significantly even in the absence of widespread defaults.

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One example of this risk occurred in April 2018, when former President Donald Trump announced new tariffs. This triggered a risk-off sentiment in markets, leading to a four-day slide in the iShares iBoxx $ High Yield Corporate Bond ETF (HYG)—one of the largest junk bond ETFs. The fund declined 3.9% during that brief period, despite no major spike in bankruptcies or defaults. This shows how sentiment alone can weigh heavily on high-yield assets.

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Conclusion

Vanguard’s Multi-Sector Income Bond ETF is positioned for those investors who are comfortable moving up the risk curve in exchange for the potential of higher returns. With a flexible approach, active management, and significant exposure to high-yield and non-traditional bond segments, VGMS aims to capture opportunities that may be overlooked in core fixed income funds.

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However, investors must remain aware of the associated risks—especially as economic uncertainty and market volatility remain in focus. For those with a moderate-to-high risk tolerance and a need for income, VGMS could serve as a strategic addition to a diversified bond portfolio, offering both yield and active positioning in an evolving interest rate environment.

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