Look No Further for Active, Short-Term Exposure to Bonds

In September, where volatility can strike at any time, investors will want the safety cushion of bonds for their portfolio. At the same time, short duration continues to be the default play as the U.S. Federal Reserve still attempts to cool down inflation further.

“Bonds are a core component of any well-diversified investment portfolio. Their role is two-fold: To generate income and bolster returns during market declines,” a Forbes Advisor article explained, adding that the volatility in 2022 “reminded investors of their utility as shock-absorbers, with most fixed income categories losing less ground than the broader stock market.”

Stocks and bonds trended downward in 2022. Still, the latter served its purpose as a safe haven asset despite rate increases. In essence, bonds still have their place in a portfolio. They can serve as a passive income source or a cushion in the case of a volatile stock market (which, as alluded to earlier, tends to happen in the month of September).

“Whether you’re age 20 or 70, you’ll want at least some exposure to bond ETFs in your portfolio,” the article said further. “That is, unless you can stomach a potential 40% decline in value when the stock market experiences one of its inevitable drops.”

Active Short Duration Exposure

When the Fed meet again to decide on interest rates in less than two weeks, over 90% are expecting another rate hike, according to the CME Group’s Fedwatch tool. If that’s the case, one exchange-traded fund (ETF) to consider in order to get active exposure to shift with the changing conditions is the Avantis Short-Term Fixed Income ETF (AVSF).

AVSF carries an expense ratio of 0.15%. It has debt holdings of various maturities (over 260 holdings), but with an average duration of 2.21 years (as of July 31). Versus a an ultra-short fund, this allows a fixed income investor to go farther out on the duration scale in order to extract more yield—its current 30-day SEC yield for that matter is 5.19%.

“With interest rates projected to keep rising under present conditions, It’s important to keep bond ETF maturities to the short term (one to three years) or intermediate term (two to 10 years),” Forbes Advisor added. “That’s because shorter-term bond investments are less exposed to rising rates.”

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