The Omicron variant and rising inflation are adding a heavy dose of uncertainty in the markets, making it necessary to shorten duration in bonds.
With the Federal Reserve eyeing rate hikes in 2022, getting extended duration could mean fixed income investors could miss out on higher yields in the future. Additionally, persistent inflation could erode bond income, so shortening duration can help mitigate rate risk.
Fortunately, there are four options from Vanguard to choose from. For a broad-based option, there’s the Vanguard Short-Term Bond Index Fund ETF Shares (BSV).
BSV seeks to track the performance of the Bloomberg U.S. 1–5 Year Government/Credit Float Adjusted Index. This index includes a diverse array of bond exposures, including all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds that have maturities between one and five years and are publicly issued.
3 More Options
For Treasury exposure with shorter duration, there’s the Vanguard Short-Term Treasury ETF (VGSH). VGSH offers exposure to short-term government bonds, focusing on Treasury bonds that mature in one to three years.
It can be an ideal option, given the uncertainty in the current market environment. 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 fixed income opportunities.
For more yield via corporate bond exposure via higher credit risk, there’s 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, which 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.
Finally, for even shorter duration that can supplant money market funds where investors want to park cash temporarily, there’s the Vanguard Ultra-Short Bond ETF (VUSB). With its low 0.10% expense ratio, VUSB’s investment objective is to seek to provide current income while maintaining limited price volatility.
The fund invests in a diversified portfolio of high-quality and, to a lesser extent, medium-quality fixed income securities. It offers a dollar-weighted average maturity of zero to two years. It’s an ideal option for investors to park cash temporarily versus lower-yielding money market funds.
For more news, information, and strategy, visit the Fixed Income Channel.