Vanguard Launched a New Junk Bond Fund. Steer Clear for Now.

The fund giant said it rolled out the Vanguard High-Yield Active exchange-traded fund, designed to hold a portfolio of junk bonds.  (Hannah Beier/Bloomberg)

Vanguard just expanded its ETF line up, targeting one of the hottest areas of the bond market. Investors may want to skip the fund—at least for now.

On Wednesday the fund giant said it rolled out the Vanguard High-Yield Active exchange-traded fund, designed to hold a portfolio of junk bonds.

The fund, which will trade under the ticker symbol VGHY, plugs a longstanding gap in Vanguard’s ETF line up.

Vanguard has offered a traditional actively managed mutual funds that targets junk bonds for decades, which it runs with longtime partner Wellington Management. But previously it hasn’t offered any junk bond ETFs.

While many of Vanguard’s index ETFs are set up as share classes of its traditional mutual funds, the two high-yield offerings are completely separate.

Junk bonds have been one of the hottest corners of the bond market this year, with high-yield bond ETFs attracting nearly $15 billion in net inflows according to FactSet. The largest junk bond ETF, the $25 billion iShares Broad USD High Yield Corporate Bond ETF has grabbed nearly $6 billion.

The iShares fund boasts an expense ratio of 0.08%, lower than 0.22% for the new Vanguard fund. But the iShares offering is an index fund. If Vanguard’s portfolio managers can outperform the benchmark, the extra fee could be worth it.

That could well turn out to be the case. While academic research has long shown actively managed stock mutual funds rarely beat the market, that’s not necessarily the case in more opaque and complicated bond markets.

Still, investors may want to give Vanguard’s new fund a pass for now. With so many investors pouring money into the high-yield sector, junk bond spreads—yield premium investors earn relative to higher-rated bonds—are at historic lows.

Junk bond yields exceed those on similarly dated Treasuries by about 2.8 percentage points, according to data compiled by the St. Louis Federal Reserve. That’s down from about five percentage points five years ago, and 4.5 percentage points this spring when worries over President Donald Trump’s tariff policies jolted markets.

The stingy spread mean investors aren’t getting paid much to take on junk bonds’ extra risks, especially with the U.S. economy looking iffy, thanks to a slowing labor market and stubborn inflation. “The junk bond market is priced for perfection,” wrote Jeff DeMaso, author of the Independent Vanguard Adviser in a post Wednesday.

In an interview, Jeffrey Johnson, Vanguard’s head of fixed-income product, said the fund should help fill out Vanguard’s ETF line up and didn’t necessarily reflect a bullish view of high-yield bonds.

“Spreads are tighter than their historical averages,” he said. “But those sorts of environments can persist and we’re not advocating investors buy this product for short-term periods.”

Write to Ian Salisbury at ian.salisbury@barrons.com