While expectations are in place for multiple interest rate hikes this year, some investors are still searching for income derived from sources beyond U.S. government debt. That includes embracing steady, investment-grade corporate bonds and the corresponding exchange traded funds.
The Vanguard Intermediate-Term Corporate Bond ETF (NYSEArca: VCIT) is one of the preferred options for investors looking to trim duration while not sacrificing too much yield by moving down to a low-yield short duration fund.
Fixed-income investors would typically move down the yield curve to hedge against rising interest rate risks. However, while moving down the yield curve provides a greater level of safety, lower duration bond funds come with less appealing yields.
VCIT seeks a “moderate level of income by investing in investment-grade corporate bonds with a dollar-weighted average maturity of five to ten years. The fund is comprised of 1801 bonds and has total net assets of $11.4 billion,” according to Investopedia.
VCIT is also one of the least expensive corporate bond ETFs with an annual expense ratio of just 0.07%, which was recently lowered from 0.1%.
Some fixed-income traders are growing concerned that the steadily rising prices and lower spreads could diminish the speculative-grade debt market’s ability to generate overall positive returns even as rising interest rates cut down the value on bonds. Those concerns could lead spark inflows to investment-grade funds such as VCIT.
While the Federal Reserve has stopped implementing accommodative measures, global central banks, like the European Central Bank and the Bank of Japan, have expanded their quantitative easing programs, pushing yields on their government debt into the negatives, which made U.S. bonds a relative bargain.
“Taking a look at the five-year weekly chart, you can see that the fund is trading with a defined uptrend. The ascending trendline has provided a consistent level of support over the years, and many active traders have used it as a guide for placing their buy and stop-loss orders. From a technical analysis perspective, the recent dip and subsequent recovery of the RSI indicator could be used as confirmation of a continued move higher just like it did back in late 2013,” according to Investopedia’s technical analysis of VCIT.
For more information on the credit market, visit our corporate bonds category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.