In recent weeks, chatter has increased regarding the likelihood of the Federal Reserve lowering interest rates at some point in 2024. Obviously, that would be good news for high yield and long-duration fixed income strategies. Should rate cuts materialize, it could encourage elevated risk appetite in the bond market.
On the other hand, it might be appropriate for many bond investors to consider allocating some of their fixed income sleeves to exchange traded funds that mitigate both credit and interest rate risk. Enter the Calvert Ultra-Short Investment Grade ETF (CVSB).
Home to investment-grade corporate and lesser, though still significant, allocation to Treasurys and U.S. government agency debt, CVSB solves the credit risk quagmire. As for rate risk, that’s hardly a concern considering the ETF’s duration of 0.57 years.
CVSB Looks Appealing
Many novice retail investors don’t realize that valuation is relevant to bonds just as it is with stocks. Specific to CVSB, the valuation discussion is important because investors don’t have to pay up to access the privileges afforded by the ETF.
“Despite inflation being more elevated than the previous decade, yields – both real and nominal – on higher quality bonds now stand at their highest levels in 15 years. This not only makes them look cheap in absolute terms, but also relative to other asset classes, particularly equities,” noted Schroders.
Another source of allure is CVSB’s 30-day SEC yield of 5.85%. That can provide some buffer against losses should the bond market take an unexpected turn for the worse.
“More broadly, the higher coupons generated not only provide a cushion against capital losses, but also offer a genuine alternative to other income-generating asset classes (including equities) for the first time in many years,” added Schroders.
CVSB’s income profile is important for another reason. As default rates tick higher, many selective fixed income investors are demanding more risk compensation, even on short-term investment-grade fare. It’s important CVSB solves that equation (it does) because those choosy buyers loom large in the bond market today.
“After years of price-insensitive buyers (i.e., central banks) dominating demand for debt, they are retreating because of quantitative tightening. This means greater reliance upon price-sensitive buyers of debt, who expect greater compensation for holding a bond over a longer period,” concluded Schroders.
To its credit, CVSB offers these advantages with the benefits of active management and an expense ratio of just 0.24% per year.
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