Incoming economic data could finally push the U.S. Federal Reserve over the edge when it comes to cutting interest rates. As such, bonds have been pushing higher as more signs point to central bank easing.
A cooling labor market paired with a weak manufacturing index could potentially mean that the Fed may be ready to cut rates. The higher-for-longer interest rates narrative has been circulating through the capital markets for much of the year, putting rate cuts on the back burner.
“The evidence is accumulating that the Fed should begin easing,” said Ronald Temple, chief market strategist at Lazard.
In the meantime, Treasury yields have been rising, pushing bond prices higher. This could open the door for hesitant bond investors to finally pounce on the price appreciation benefits of bonds while still reaping the rewards of high yields now before they continue falling.
Investors looking for core bond exposure to supplement an equities portfolio have a couple of options from Vanguard. They can opt for broad exposure via a passive ETF or obtain more flexibility with an active one.
A Passive and Active Option
For a passive option, consider using the Vanguard Total Bond Market Index Fund ETF Shares (BND). It seeks to track the performance of the Bloomberg U.S. Aggregate Float Adjusted Index. That index represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States, including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than one year. BND comes with a low expense ratio of 0.03%.
For added flexibility in bond market, active funds can be beneficial. With their expense ratios more competitive now versus their passive counterparts, fixed income investors may want to consider active funds like the Vanguard Core Bond ETF (VCRB). As mentioned, active management helps maintain pliability, especially if the bond market becomes volatile. Furthermore, holdings come under the auspices of experienced portfolio managers.
Similar to BND, VCRB mitigates credit risk via diversified exposure to the U.S. investment-grade bond market. That doesn’t mean sticking strictly within the safe confines of U.S. Treasuries. Like BND, the actively managed VCRB extends its exposure to other fixed income assets for diversification, including mortgage-backed securities and corporate securities. Again, with the active exposure that VCRB offers, investors can harness the portfolio management capabilities of the Vanguard Fixed Income Group with only a 0.10% expense ratio.
For more news, information, and analysis, visit the Fixed Income Channel.
