Vanguard U.K. Gilt UCITS ETF more "risky" than VG UK S/T Inv Gde Bond Index Fund (VGUKSP)?

JohnWinder

confidence that the "3" grading allotted to it is less risky than the "5"

I don't know, do others, how the risk rating is determined. I suppose there's a formula that gives some weight to the relevant factors, but we all have different views on how risky we think a credit rating of BBB+ is, so we might weight those factors differently from how the algorithm weights them. Secondly, a well rated corporate bond becomes junk under the right conditions which the algorithm can't predict, such as some of the Virgin airlines bonds becoming near worthless, never to recover, when a pandemic stopped planes flying. Thirdly, even if a #3 risk is actually less than a #5 risk, that scale is probably ordinal not interval, so #3 might be very much closer to #5 than 3 inches is to 5 inches on a 7 inch scale.

GeoffTF

The procedure for calculating the Risk Class is specified in the "Annex to CESR’s technical advice on the level 2 measures related to the format and  content of Key Information Document disclosures for UCITS (Ref. CESR/09-949): methodology for the calculation of the synthetic risk and reward indicator", which can be found here:
https://www.esma.europa.eu/sites/default/files/library/2015/11/09_1026_final_kid_srri_methodology_for_publication.pdf
The Synthetic Risk and Reward Indicator (SRRI) is based on the volatility of the funds over the past five years. The Risk Class depends on which interval the volatility falls within:
1:  0%-0.5%
2:  0.5%-2%
3:  2%-5%
4:  5%-10%
5:  10%-15%

6:  15%-25%

There is clearly a big difference between the volatility of Risk Class 3 and Risk Class 5. Nonetheless, what actually matters is the volatility of your portfolio as whole not the individual funds within it. That depends on the correlation of the prices of the various funds as well as their individual volatilities.