Fixed income investors are finding themselves in a defensive stance against inflation to start 2022, but there are ways to ward off its effects.
In combination with rising bond yields, inflation is dumping a heavy bucket of volatility on the equities market as well. As the Consumer Price Index, a key indicator for inflation, continues to swell, it’s creating a wall of worry for bond investors.
That anxiety can be alleviated with Treasury inflation-protected securities (TIPS), which move in unison with rising interest rates, should the Federal Reserve get aggressive with a tighter monetary policy. Bond investors can get this exposure with the Vanguard Short-Term Inflation-Protected Securities Index Fund ETF Shares (VTIP).
VTIP seeks to track the performance of the Bloomberg U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Year Index. 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.
The manager attempts to replicate the target index by investing all, or substantially all, of its assets in the securities that make up the index, holding each security in approximately the same proportion as its weighting in the index. VTIP, like many of Vanguard’s fixed income ETFs, comes with a low expense ratio of 0.05%.
Getting Active, Short Duration
Another way to play defense against inflation is to mitigate rate risk by shortening duration, which is possible with a fund like 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 0–2 years. The fund is designed to give investors low-cost exposure to money market instruments and short-term high-quality bonds, including asset-backed, government, and investment-grade corporate securities.
“Generally, if you’re trying to reduce interest rate risk, you’ll want to consider bonds or bond funds with a shorter duration, said Paul Winter, a CFP and owner of Five Seasons Financial Planning in Salt Lake City,” CNBC reports.
“Also, bonds with higher coupon rates and lower credit quality tend to be less sensitive to higher interest rates, other factors being equal,” Winter said.
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