Given their overall credit risk versus safer government debt, corporate bonds may not get enough exposure in a retirement portfolio. However, they can serve a purpose as long as investors are aware of their nuances.
“Corporate bonds can be a valuable building block in a retirement portfolio,” a Forbes article explained, noting that fixed income investors have the ability to lock in yields in the short- or long-term horizon versus other comparable income sources. That’s an ideal feature for retirees looking to maximize their passive income potential.
“That’s in contrast to instruments such as certificates of deposit and money market funds, for which the payouts decline when interest rates fall,” Forbes added further. “Another attractive feature of this asset class is the availability of specific markers to gauge the risk of individual bonds available for consideration.”
Of course, with the added yield comes additional credit risk along with the current economic environment where the U.S. Federal Reserve is tightening monetary policy — thus, rate risk is continued concern. This is what investors must be wary of when it comes to selecting individual bonds for a retirement portfolio.
Quality Corporate Bond Exposure
Getting quality exposure to corporate debt can help ameliorate credit risk fears, but rather than pore over individual bonds and hand-pick the holdings themselves, exchange traded funds (ETFs) can offer easier ingress to exposure. ETFs can essentially do all the heavy lifting by constructing an ideal corporate bond portfolio.
With an eye on quality as a key driver for corporate bond exposure in a retirement portfolio, investors can consider the Vanguard Total Corporate Bond ETF ETF Shares (VTC). The fund seeks to track the performance of a broad, market-weighted corporate bond index.
Additionally, VTC is a fund of funds and employs an indexing investment approach designed to follow the performance of the Bloomberg U.S. Corporate Bond Index, which measures the investment-grade, fixed-rate, taxable corporate bond market. The index includes U.S. dollar-denominated securities publicly issued by industrial, utility, and financial issuers. The fund comes with a low expense ratio of 0.05% and as of August 25, a 30-day SEC yield of 3.52%.
Summarily, VTC offers:
- Performance tied to the Bloomberg U.S. Corporate Bond Index
- Broad, diversified exposure to the investment-grade U.S. corporate bond market
- A unique ETF of ETFs structure
- An intermediate-duration portfolio with exposure to short-, intermediate-, and long-term maturities
- Current income with high credit quality
For more news, information, and strategy, visit the Fixed Income Channel.