Rising inflation and interest rates are enough headwinds for the bond market, but there are options despite the tricky economic environment that bond investors face.
There’s still a place for bonds in a portfolio. Given the current market landscape, investors can opt for Treasury inflation-protected securities (TIPS), short-duration, and high-dividend yields.
“They are safer than most other asset classes and higher-yielding than cash,” said “If you don’t want to own interest-rate sensitive bonds, shorter-term bonds carry less interest rate risk (offset by lower yields). Higher-yielding bonds are also available, provided you are comfortable with their unique risks.”
“Owning bonds today is still relevant because they provide steady income and protect portfolios when risky assets fall,” Wendling added. “If you rely on your portfolio for spending, the bond portion should protect your spending level. And, you can sell bonds and take advantage of lower prices in risky assets. If all of your money is in risky assets when they fall, you would be unable to ‘buy low.'”
As mentioned, TIPS are an option to counteract inflation. That can be attained with the Vanguard Short-Term Inflation-Protected Securities Index Fund ETF Shares (VTIP).
VTIP seeks to track the Bloomberg U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Year Index performance. The index is a market capitalization-weighted index that includes all inflation-protected public obligations issued by the U.S. Treasury with remaining maturities of less than five years.
Short-Duration and High-Yielding Dividends
Shortening duration is possible with the Vanguard Short-Term Treasury ETF (VGSH). This ETF offers exposure to short-term government bonds, focusing on Treasury bonds that mature in one to three years.
Shortening duration can help with interest rate risk as yields continue to tick higher. The benchmark 10-year note in particular reached a high not seen in a couple of months as it continued to push past the 1.5% yield marker.
Lastly, fixed income investors can stay ahead of inflation with higher yield. That can be had with the Vanguard High Dividend Yield Index Fund ETF Shares (VYM).
Dividends are an alternate route to high-yield debt with ETFs like VYM. The fund employs an indexing investment approach designed to track the performance of the FTSE High Dividend Yield Index, which consists of common stocks of companies that pay dividends that generally are higher than average.
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