As Rates Move Higher, Here's a Pair of Bond ETFs to Consider

After a strong run following the pandemic, home prices are starting to come back down to earth. Rising interest rates have been tamping down home prices, which have been putting off prospective home purchasers.

According to a CNBC report, signed contracts for existing home purchases fell 20% during the month of June relative to a year ago (based on data from the National Association of Realtors). That figure marks the slowest pace since September 2011, notwithstanding the first two months of COVID-19 lockdowns where prices fell but then subsequently rebounded.

“Looking ahead, a slowdown in economic activity and pullback in business investments could lead to a moderation in the pace of mortgage rate gains, as investors shift allocations toward the safety of bonds,” said George Ratiu, senior economist at “Combined with the increase in housing supply, we could see improved opportunities for homebuyers later in the year.”

2 Bond Funds to Consider

With the Fed increasing rates another 75 basis points, one fund to watch is the Vanguard Mortgage-Backed Securities Index Fund ETF Shares (VMBS), which seeks to track the performance of a market-weighted mortgage-backed securities index. The fund employs an indexing investment approach designed to track the performance of the Bloomberg U.S. MBS Float Adjusted Index, which covers U.S. agency mortgage-backed pass-through securities.

Even as rates tick higher, VMBS can also rise in tandem since it derives its income from higher rates in mortgages. With debt holdings backed by the government, VMBS gives fixed income investors that extra layer of security.

With rates continuing to rise, one way to counter the risk is to opt for short duration. As such, one fund to consider is the Vanguard Short-Term Treasury ETF (VGSH).

With short duration in focus, VGSH is a prime option to consider. This ETF 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 erode income derived from bonds.

For more news, information, and strategy, visit the Fixed Income Channel.