Consider VCSH for Short-Duration, Investment-Grade Corporate Bonds

It’s been a bad year for bonds, with 2022 being the worst period for the asset class in nearly a century. But of course, not all fixed income funds are the same, and abandoning this asset class entirely may not be the best move for long-term investors. After all, not only are bond funds currently at bargain bin prices, but they’re also very likely to rebound.

Morgan Stanley’s Global Investment Committee sees an opportunity in short-duration, U.S. investment-grade corporate bonds for a few reasons. For one, at around 5.6%, nominal yields are the highest they’ve been in a decade. Another reason is that short-duration bonds may be less sensitive to higher rates, especially if the Federal Reserve continues to raise rates above market expectations.

Plus, on average, the credit quality is solid, and overall gross leverage is reasonable at 2.3. Finally, many investment-grade debt issuers have already locked in low rates, with additional refinancing activity expected to be modest for the next 18 months.

“In this environment, we reiterate the potentially stronger risk/reward profile offered by short-duration, investment-grade bonds,” wrote Lisa Shalett, chief investment officer, Wealth Management, at Morgan Stanley. “Investors should consider locking in solid yields over the near term as we wait out the stock market’s roller coaster.”

So, for investors looking to either return to the market or have extra cash to put to work, thinking of getting back into the market or have excess cash to deploy, short-duration, investment-grade corporate bond ETFs like the Vanguard Short-Term Corporate Bond ETF (VCSH) may be a good place to start.

VCSH 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 follow the performance of the Bloomberg U.S. 1-5 Year Corporate Bond Index.

This index 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. Under normal circumstances, at least 80% of the fund’s assets will be invested in bonds included in the index.

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