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Curious about of VFSTX vs. VFIIX for conservative bond funds

(VFSTX is Vanguard Short-Term Corporate, VFIIX is Vanguard's GNMA fund. I understand generally what GNMAs are and how they are different than "normal" bonds (govt backed, but prepayment risk, etc.).)
If I look at vanguard.com for information on these two funds I see the following:
VFSTX: Avg Duration 2.3 years % of fund Aa3 or above: 48% Most recent income distribution yield: 3.10% SEC yield: 1.82% ("based on holdings' YTM for past 30 days") Vanguard's internal classification: "Vanguard funds are classified as conservative if their share prices are expected to remain stable or to fluctuate only slightly. Such funds may be appropriate for the short-term reserves portion of a long-term investment portfolio, or for investors with short-term investment horizons (three years or less."
VFIIX: Avg Duration: 1.9 years % of fund Aa3 or above: 100% (all is Aaa) Most recent income distribution yield: 3.22% SEC yield: 3.20% ("based on holdings' actual income for the past 30 days") Vanguard's internal classification: "Vanguard funds classified as conservative to moderate are subject to low-to-moderate fluctuations in share prices. In general, such funds may be appropriate for investors with medium-term investment horizons (four to ten years)."
Questions: * Given that VFIIX has much higher credit quality and slightly lower duration than VFSTX, why does Vanguard consider VFSTX to be more conservative? Is it because VFIIX generally has longer duration but for the time being the managers have cranked duration way down because of market conditions?
* Why do the funds use different methods of computing the SEC yields? What are the pros/cons of each method of calculation?
* What explains the big gap between VFSTX's SEC yield and the actual distribution yield? Higher coupon bonds trading at a premium (hence higher distributions but therefore a lower YTM)? And the implications of that are...? Expectation that actual distribution yield will drop as the higher-yielding bonds mature and are replaced with lower-yielding ones? Drop in NAV as the premium bonds drop back to par as they get closer to maturity? Both?
* It seems unlikely that interest rates can drop much more, rendering GNMA prepayment risk a moot point. So given the high credit quality and current short duration of VFIIX,if VFSTX's yield drops down to in line with its SEC yield but VFIIX stays around 3%, wouldn't it make sense to switch over? Or am I missing some important "gotcha"?
-- Rich Carreiro snipped-for-privacy@rlcarr.com
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Rich Carreiro

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