Most Retirees Are Overlooking Vanguard’s Best Corporate Bond ETF. It Yields 4.73% and Pays Monthly.

If there’s one thing retirees tend to want, it’s predictable income without too much risk. And there are several ways to get it.

First, there’s Social Security, which is, of course, a no-risk income stream. There’s also the option to park cash in a high-yield savings account or create a CD ladder.

The upside of having money in the bank is that it’s FDIC-insured, creating a risk-free environment provided you’re within FDIC limits. And in recent years, it made sense to keep money in cash, with interest rates being so high. After all, why take the risk on bonds when you could earn a risk-free 5% in a bank account?

But now, as interest rates fall, it could pay for more retirees to shift out of cash and into bonds. And there’s one bond fund in particular it pays to check out.

Is the Vanguard Intermediate-Term Corporate Bond ETF right for you?

The Vanguard Intermediate-Term Corporate Bond ETF (VCIT) holds investment-grade corporate bonds with maturities in the five to 10-year range. With a current 4.73% yield and a monthly payment schedule, it’s easy to see the appeal of VCIT, especially as falling interest rates pull yields on savings accounts and CDs lower.

VCIT holds an impressive $68.5 billion in assets. But like many Vanguard funds, its expense ratio is super low at just 0.03%. That means you’re paying a negligible fee for what could be a whole lot of upside.

Of course, before investing in any asset, it’s important to understand its risk profile. As an asset class, bonds are typically a lot less volatile than stocks. Within the bond category, corporate bonds are generally more volatile than Treasury bonds and municipal bonds.

But VCIT’s strategy is to focus on investment-grade bonds across many different companies, which helps spread risk out. And it’s a much less risky investment than a high-yield bond ETF. This doesn’t mean VCIT is a good fit for you, though.

Some pitfalls of VCIT

While VCIT is generally considered a moderate-risk investment, you should understand that all bonds are sensitive to interest rate changes. When interest rates rise, bond prices can drop, and vice versa. Since VCIT holds bonds with intermediate-term maturity dates, it has moderate sensitivity to rate changes.

It’s also worth noting that while VCIT invests in investment-grade bonds, bonds can always get downgraded. Some of those bonds could also default, impacting the fund’s overall returns.

Also, corporate bond interest is taxed as ordinary income, the same way interest from savings accounts and CDs is taxed. For this reason, VCIT could work best inside a traditional or Roth IRA. And if you’re in a higher tax bracket, you may want to look at municipal bonds if your goal is to generate steady income, as the interest they pay is always tax-exempt at the federal level.

The bottom line

VCIT could be a smart investment for retirees who want to focus on steady income and prioritize income over growth. It can work well as part of a balanced portfolio, provided you understand the tax implications.

If you’re torn between VCIT and keeping money in cash, know that while you may be looking at similar returns today, as rates continue to fall, VCIT will likely have a strong advantage. Cash, however, carries less risk. You’ll need to decide which takes priority.

Keeping money in cash could make more sense if your goal is to preserve liquidity and have more of a buffer against market downturns. VCIT could make more sense if you want higher long-term income potential and can tolerate the risks that come with it.