Ease Rate Shift Worries With This Ultra-Short Bond ETF

The past few years have been a boon for fixed income investors. That’s because the Fed’s aggressive rate-hiking strategy has been driving up yields. The anticipation of rate cuts building may cause fixed income investors to fret. But an ultra-short bond option in the Vanguard Ultra-Short Bond ETF (VUSB) could help ease those worries.

The prevailing sentiment is that the Fed won’t likely pivot from its rate-cutting goals this year. But inflation data could show that the economy is running hotter than expected. VUSB essentially helps to insulate against potential rate hikes by focusing on debt with maturities of less than two years. That reduces rate risk. It’s almost imperative given the Fed’s proclivity to make rate decisions based on economic data. That said, the data shows rate cuts won’t happen as quickly as expected.

“The Fed is considering rate cuts only because inflation has steadily fallen from a peak of 9.1% in June 2022,” AP News reported. “As a result, it is approaching rate cuts the way it usually does rate hikes: Slowly and methodically, while trying to divine the economy’s direction from often-conflicting data.”

Low Cost With Active Management

VUSB has a 30-day SEC yield of just over 5%, as of March 14. That makes it an attractive option for those looking to park their cash temporarily. It’s a compelling alternative to a money market account that earns interest. Furthermore, VUSB is actively managed, allowing for flexibility in the ultra-short-term bond market, at a low expense ratio of just 0.10%.

“Investors looking to reduce interest rate sensitivity further without compromising on yield can use an actively managed bond fund like VUSB,” U.S. News said. “This ETF targets a portfolio of mostly investment-grade corporate and asset-backed bonds with a weighted average maturity of 0 to 2 years. By doing so, it manages to achieve a low average duration of just 1 year, insulating it from interest rate shifts.”

Fixed income investors who want to stretch further out on the yield curve can opt for the Vanguard Short-Term Bond Index Fund ETF Shares (BSV). The fund seeks to track the performance of the Bloomberg U.S. 1-5 Year Government/Credit Float Adjusted Index. This index includes a diverse array of bond exposures. They include all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds that have maturities between one and five years and are publicly issued. With its low 0.04% expense ratio, BSV boasts a 30-day SEC yield of 4.69% as of March 14.

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