Last week, I outlined how to construct a portfolio of stocks and high-quality bonds to replicate the returns of high-yield corporate bonds. This week I’m tackling investment-grade corporate bonds.
The same basic logic as last week holds: There’s not much unique about investment-grade corporate bonds that you can’t achieve with a diversified portfolio of stocks and high-quality bonds. The only difference is you don’t need as much in stocks to replicate the returns of investment-grade corporate bonds as you do with high-yield corporate bonds. This is because high-yield corporate bonds are more similar to stocks because they both have substantial exposure to default risk. Investment-grade corporate bonds have less default risk and therefore aren’t as similar to stocks.Here are the results. We used the same funds as we did last week: Vanguard’s S&P 500 fund (VFINX) for stocks and Vanguard’s Intermediate-Term Treasury fund (VFITX) for high-quality bonds. This time, we’ll use Vanguard’s Intermediate-Term Investment Grade fund (VFICX) as the bogey. The period is the longest available: December 1993 (first full month of returns for VFICX) through April 2013.