While capital markets are expecting rate cuts to come this year, the pace at which they occur and when certainly comes into question. While the Fed continues to mull rates, fixed income investors can consider three specific ETFs from Vanguard to get more yield.
Yields have pushed higher, with the expectation coming from Federal Reserve Governor Christopher Waller of slower-than-expected rate cuts. The stock market has gotten off to a rocky start in 2024, leading many to believe rate cuts were already priced into 2023’s market rally.
All Eyes on the Fed
In the meantime, all eyes will remain fixated on the Fed and when rate cuts happen and as mentioned, the pace at which they occur.
“When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully,” Waller said. “In many previous cycles … they cut rates reactively and did so quickly and often by large amounts. This cycle, however, … I see no reason to move as quickly or cut as rapidly as in the past.”
Those who want to add more yield to their fixed income portfolios can consider emerging markets (EM) bonds. With rate cuts eventually occurring, this should translate into more strength for EM assets such as bonds. And with a 30-day SEC yield 6.69% as of January 12, the Vanguard Emerging Markets Government Bond Index Fund ETF Shares (VWOB) is worthy of consideration.
VWOB seeks to track the performance of a benchmark index that measures the investment return of U.S.-dollar-denominated bonds issued by governments and government-related issuers in EM countries. The fund employs an indexing investment approach designed to track the performance of the Bloomberg Barclays USD Emerging Markets Government RIC Capped Index.
Long and Short Duration Options
For those who want yield and are willing to take on more credit and rate risk via long-term corporate bonds, consider the 30-day SEC yield of 5.33% in the Vanguard Long-Term Corporate Bond Index Fund ETF Shares (VCLT). It tracks the performance of the Bloomberg U.S. 10+ Year Corporate Bond Index, which includes U.S.- dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies. It has maturities greater than 10 years.
Fixed income investors don’t have to always step far out on the yield curve to get the best yield. With a 30-day SEC yield of just over 5%, another option to consider is the Vanguard Ultra-Short Bond ETF (VUSB). While the prevailing sentiment is that the Fed won’t likely pivot from its rate-cutting goals this year, data could show that the economy is running hotter than expected. To add peace of mind to the prospect of further rate hikes, VUSB limits rate risk by focusing on debt with shorter durations.
For more news, information, and strategy, visit the Fixed Income Channel.