VWELX & VWINX — The Perfect Way To KISS!

Many years ago I enrolled in classes which focused on electrical energy and fluid dynamics. In the electrical energy class I learned how electricity always seeks the least resistant path to ground and I remember thinking that all elements in nature (except for human beings — well — most humans anyway) follow a path of least resistance. Over the years I have thought about that concept many times, especially during those times when I have had a tendency to make things much more difficult for myself than they needed to be. Now, whenever I find myself in such a situation, I have often turned around and thrown myself a KISS — not in the literal sense, of course, but in the sense of its acronymic meaning: “Keep It Simple Silly.”

Now that I am quickly approaching the oh so illusive golden years of my life, I have found myself seeking more stability — especially with regard to my investments. In short, I’m looking to keep things simple. With that desire at the forefront of my mind, I have moved most of my investments out of equities and into bonds, especially high-grade corporate bonds. The corporate bond market, however, is a segment of the investment world that has not quite opened-up to individual investors. Thus, for many individual investors it has been difficult to invest in individual issues of corporate debt. Over time, though, I believe that will change. Until such time, however, investors who may be interested in investing more heavily in bonds have had to rely on mutual funds and ETFs — not entirely bad alternatives.

Two of the best ETFs I have found for investing in corporate bonds are the Vanguard Long-Term Corporate Bond ETF (VCLT) and the Vanguard Intermediate-Term Corporate Bond ETF (VCIT). Presently, I hold shares of VCLT in two of my accounts. One of those accounts is a Uniform Transfers to Minors Act account or UTMA account for short. A UTMA account is “a mechanism under which gifts can be made to a minor without requiring the presence of an appointed guardian for the minor, and which satisfies the Internal Revenue Service requirements for qualifying a gift of up to $14,000 for exclusion from the gift tax. It is an extension of the Uniform Gifts to Minors Act (UGMA).” [Link]

I set-up the UTMA account for my little girl and I have been managing it with a keen focus on conservative investing and preservation of capital. I have had great luck with VCLT and I very much trust the investment, so I felt it would be a suitable investment for her account. However, given that my young, little investor is so — well — young, I wanted to look for simple and relatively safe ways for her to gain exposure to equities as well. Ultimately, my research led me to two Vanguard mutual funds: Vanguard’s Wellington Fund Investor Shares (VWELX) and Vanguard’s Wellesley Income Fund Investor Shares (VWINX).

Both funds operate under a proportional investment strategy (i.e. 66 equities to 33% bonds in VWELX and 66% bonds to 33% equities in VWINX) and both are very mature funds. The more senior of the two, VWELX, began trading on July 1, 1929 and its offspring, VWINX, began trading on July 1, 1970. A comparison of the major characteristics of the two funds can be seen in the table below.

VWELX Characteristics as of 04/30/2013 VWINX Characteristics as of 04/30/2013
Fund total net assets: $72.5 billion Fund total net assets: $35.3 billion
Net assets of ten largest holdings: 16.2% Net assets of ten largest holdings: 13.4%
Number of stocks: 101 Number of stocks: 65
Number of bonds: 612 Number of bonds: 707
Average maturity: 9.1 years Average maturity: 9.3 years
Average duration: 6.2 years Average duration: 6.4 years
Month-end ten largest holdings
(16.2% of total net assets)
as of 04/30/2013
Month-end ten largest holdings
(13.4% of total net assets)
as of 04/30/2013
1    Wells Fargo & Co. 1    Johnson & Johnson
2    Exxon Mobil Corp. 2    Chevron Corp.
3    Verizon Communications Inc. 3    Merck & Co. Inc.
4    JPMorgan Chase & Co. 4    Marsh & McLennan Cos. Inc.
5    Merck & Co. Inc. 5    Royal Dutch Shell plc
6    Pfizer Inc. 6    Microsoft Corp.
7    Microsoft Corp. 7    Pfizer Inc.
8    International Business Machines Corp. 8    JPMorgan Chase & Co.
9    Comcast Corp. 9    Philip Morris International Inc.
10  Johnson & Johnson 10  Eaton Corp. plc

The funds’ bond characteristics are as follows:

Wellington Fund Inv (VWELX) Distribution by credit quality** (% of bonds) as of 04/30/2013 Wellesley Income Fund Inv (VWINX) Distribution by credit quality** (% of bonds) as of 04/30/2013
U.S. Government 20.5% U.S. Government 20.0%
Aaa 2.4% Aaa 3.9%
Aa1 0.9% Aa1 1.6%
Aa2 3.8% Aa2 4.1%
Aa3 8.9% Aa3 8.8%
A1 10.7% A1 10.6%
A2 14.2% A2 13.9%
A3 17.4% A3 20.6%
Baa1 9.9% Baa1 8.7%
Baa2 5.2% Baa2 5.2%
Baa3 0.6% Baa3 0.8%
Ba1 0.0% Ba1 0.0%
Ba2 0.0% Ba2 0.0%
Ba3 0.0% Ba3 0.0%
B1 0.0% B1 0.0%
B2 0.0% B2 0.0%
B3 0.0% B3 0.0%
Caa1 0.0% Caa1 0.0%
Caa2 0.0% Caa2 0.0%
Caa3 0.0% Caa3 0.0%
Ca 0.0% Ca 0.0%
C 0.0% C 0.0%
Total                                             100.0% Total                                             100.0%

For a complete overview of both funds, please see the attached prospectuses:

In the following charts we can see that both funds have been relatively stable and have followed a steady stair step pattern higher.

VWELX Chart as of 05-13-13

VWINX Chart as of 05-13-13


Both funds are well managed, conservative investments which offer individual investors “simple” solutions for creating diversified, revenue generating portfolios at reasonable costs (a 0.25% Expense Ratio for both funds). The current distribution yield for VWELX is 2.63%, and it is 3.39% for VWINX. Both funds pay their dividends on a quarterly basis in March, June, September and December, and both distribute short and long-term capital gains at the end of the calendar year (i.e. in December). Depending upon one’s investment needs and risk tolerance level, VWELX and VWINX offer a choice regarding an investors desire to be more heavily weighted toward stocks or bonds.

Note: Research for this article came directly from Vanguard’s Web site and from fund prospectuses. Charts provided by Yahoo! Finance.

Disclosure: I am long VCLT.

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