The fund has almost $70 billion of assets under management, and as of year-end 2009, it held about:
- 39 percent of its assets in mortgage-related securities
- 36 percent in U.S. government bonds
- 19 percent in corporate bonds
- 6 percent in foreign bonds (both corporate and government)
Morningstar's database goes back 20 years, so that's our time frame. During the period February 1990 through January 2010:
- The Vanguard fund returned 7.0 percent with a standard deviation of 5.0 percent.
- Five-year Treasuries returned 6.7 percent with a standard deviation of 5.9 percent.
- Portfolio A will allocate its 40 percent fixed income allocation to Vanguard's fund.
- Portfolio B invests in five-year Treasuries.
- Portfolio A had an annualized return of 8.3 percent with a standard deviation of 12.8 percent and a Sharpe ratio of 0.41.
- Portfolio B had an annualized return of 8.3 percent with a standard deviation of 12.0 percent and a Sharpe ratio of 0.43.
To summarize, this is why it's important to avoid looking at investments in isolation. Even though the Vanguard fund produced better returns than five-year Treasuries, you wouldn't have been rewarded with greater returns, let alone greater risk-adjusted returns. Finally, I think it's important to add the same comment I made about including GNMAs in a portfolio: There are far worse "mistakes" than investing in the Vanguard total bond market fund.