The Federal Reserve’s first rate cut of the year may have forced fixed income investors to rethink their bond exposure. In the case of government bonds, investors may want to take an active, diversified approach with the Vanguard Government Securities Active ETF (VGVT).
The 25 basis point cut didn’t surprise much of the capital markets. But it did leave the door open for more market uncertainty. Market prognosticators are now wondering how aggressive or conservative the central bank will be with cuts moving forward. Following the rate cut announcement, the Fed forecasted that only one rate cut will occur next year. Economic data will ultimately decide how the Fed implements interest rate policy. But in the meantime, investors will want to add more diversification. In the case of government securities exposure, this is where VGVT shines.
Again, the advantage of VGVT is its diversified holdings. As of August 31, the fund has almost 200 holdings. That makes it more selective compared to the almost 500 bonds in the fund’s benchmark Bloomberg U.S. Government TR Index. VGVT mainly focuses on Treasuries, but it will also invest in other agency-backed securitized products. Its current portfolio composition has 78% allocated into Treasuries, while 20.5% goes to commercial mortgage-backed securities and 1.3% in government mortgage-backed securities.
Rather than stick to specific maturity date ranges in short-, medium, or long-term bond funds, VGVT disperses exposure over various maturities and durations. The average duration is close to its benchmark (5.7 years) as well as its average effective maturity (7.6 years).
As of September 25, the fund’s 30-day SEC yield stands at 4.%.
The Active Advantage of VGVT
Because of the uncertainty in interest rate policy, an active approach to the bond market is almost imperative. That is especially the case for government securities. They carry their own unique set of nuances and complexities relating to that corner of the bond market.
VGVT taps into the experience and expertise of the vaunted Vanguard Fixed Income Group. The portfolio managers can adjust the holdings of the fund when market conditions warrant changes. This allows for additional flexibility, allowing portfolio managers to seek more income in other opportunities or adjust holdings to maximize upside or minimize the downside.
Furthermore, VGVT offers a cost-effective solution. The fund comes with 10 basis points, falling well below the FactSet segment average for similar funds.
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