In the current rising rate environment, a number of financial advisors are suggesting investors to treat fixed income like the sun and limit prolonged exposure. In this case, as the Federal Reserve’s predilection for raising interest rates does not appear to be changing anytime soon, it’s best to take advantage of these short-term rate adjustments by limiting duration.
In the current economic landscape, Collin Martin, director of fixed income for Charles Schwab’s Schwab Center for Financial Research, is advising bond investors to avoid fixed-income investments with long-term yields in the interim.
“For now, I still think investors should focus on short-term fixed income. I don’t think the risk/reward makes much sense to extend the duration,” said Martin. “For now, shorter-term investments are offering higher yields, but in case yields do rise, I’m telling clients to get closer to the point where it makes sense to start extending duration.”
With a focus on short-duration and high yields, here are three corporate bond ETFs fixed-income investors can capitalize on as part of a short-term strategy to capture any higher rate adjustments (if the debt contains a variable rate), but protect investors from any market shocks due to long-term exposure.
Related: ESG Integration in Fixed Income
1. Vanguard Short-Term Corporate Bond ETF (NASDAQ: VCSH)
VCSH seeks to track the performance of the Bloomberg Barclays U.S. 1-5 Year Corporate Bond Index, which includes U.S. dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies, with maturities between 1 and 5 years. While the fixed-rate component won’t realize any gains from higher rate adjustments, it will shield the investor from rate drops should the Fed backtrack on their hawkishness. Per Yahoo! Finance, VCSH has managed to provide a 1.6% return the last three years.
2. iShares 1-3 Year Credit Bond ETF (NASDAQ: CSJ)
CSJ seeks to track the investment results of the Bloomberg Barclays U.S. 1-3 Year Credit Bond Index, which measures the performance of investment-grade corporate debt and sovereign, supranational, local authority and non-U.S. agency bonds that are U.S. dollar-denominated and have a remaining maturity of greater than one year and less than or equal to three years–lesser duration for investor protection from volatility in longer maturities. Per Yahoo! Finance, CSJ provided a 1.6% return within the last three years.
3. SPDR Portfolio Short Term Corp Bd ETF (NYSEArca: SPSB)
SPSB seeks to provide investment results that mimic the price and yield performance of the Bloomberg Barclays U.S. 1-3 Year Corporate Bond Index. The fund generally invests substantially all, but at least 80%, of its total assets in the securities comprising the index or in securities that have similar economic characteristics to those of the securities that comprise the index. Since the index is designed to measure the performance of the short term U.S. corporate bond market, it gives investors a solid mix of interest rate risk hedging while limiting duration. SPSB has provided investors with a 1.28% return the last three years.
Related: Fixed-Income ETF Launches with Unique Value Screener
For more trends in fixed income, visit the Fixed Income Channel.