Fresh off another 75 basis point rate hike, the U.S. Federal Reserve looks intent on stamping out red-hot inflation through the rest of 2022, putting short-duration bonds in focus for fixed income investors.
Simply opting for debt with early maturity dates can help mitigate rate risk, but bond funds like exchange traded funds (ETFs) can offer an added cushion. With rates higher, they also offer the added punch of extra income in times when rate hikes have been the norm.
“Conservative investors should consider short-term bond mutual and exchange-traded funds, which are less sensitive to future interest rate increases and now sport plump yields,” said a Kiplinger article, which highlighted a pair of funds from Vanguard to consider.
“If yields of 3% to 3.5% are what you’re looking for, short-term Treasuries have become a lot more attractive,” said Elaine Stokes, executive vice president and portfolio manager at investment firm Loomis Sayles.
2 Options from Vanguard
Kiplinger mentioned the Vanguard Short-Term Treasury ETF (VGSH). With short duration in focus, VGSH is a prime option to consider, as the fund offers exposure to short-term government bonds, focusing on Treasury bonds that mature in one to three years.
It’s an ideal option, given the uncertainty in the current market environment with the Fed’s rate-hiking measures amid rampant inflation. Additionally, the safety of government bonds can offer investors a safe haven against stock market volatility, while short-term bonds limit the risks of potential rate rises that can rob investors of their income.
Overall, VGSH:
- Seeks to provide current income with modest price fluctuation.
- Invests primarily in high-quality (investment-grade) U.S. Treasury bonds.
- Maintains a dollar-weighted average maturity of one to three years.
For added yield in lieu of more credit risk, fixed income investors can opt for the Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH), which seeks to track the performance of a market-weighted corporate bond index with a short-term dollar-weighted average maturity. The fund employs an indexing investment approach designed to track the performance of the Bloomberg U.S. 1-5 Year Corporate Bond Index.
This index includes U.S. dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies, with maturities between one and five years. Under normal circumstances, at least 80% of the fund’s assets will be invested in bonds included in the index.
For more news, information, and strategy, visit the Fixed Income Channel.