A Cost-Effective Short-Term Corporate Bond ETF

Investors looking for the income benefits of investment-grade corporate bonds while limiting duration risk have plenty of options to consider in the world of ETFs. One of the most cost-effective options is the Vanguard Short-Term Corporate Bond ETF (NASDAQ: VCSH).

In a rising rate environment, the price of older bonds with lower rates will fall since these older debt securities appear less attractive and traders would demand a discount on the older lower-yielding debt. On the other hand, new bonds are issued at the newer and higher rates, so investors would be less inclined to hold older debt securities with less attractive yields. As a result, the less appealing older bonds will see prices fall in response to the diminished demand.

Bond funds hold a collection of debt with varying maturities, buying and selling debt securities to maintain their short-, intermediate- or long-term strategy. When it comes to bond ETFs, investors should look at the duration, or a bond fund’s measure of sensitivity to gauge their investment’s exposure to changes in interest rates – a higher duration means a higher sensitivity to shifts in rates.

VCSH, which holds investment-grade corporate debt with maturities ranging from one year to five years, charges 0.07% per year, making it cheaper than 91% of competing strategies, according to Vanguard data.

Inside VCSH

VCSH is a popular option for investors looking for a steady, inexpensive avenue to corporate bonds without significant interest rate risk. At the end of May, the ETF was home to $21 billion in assets under management.

VCSH holds nearly 2,200 bonds. Nearly 88% of those holdings are rated A or Baa. The average duration on VCSH holdings is 2.8 years with a yield to maturity of 3.2%.