Rate hikes obviously decimated the bond market in 2022, warranting the need to get short-term or even intermediate-term bond exposure. Fast forward to 2023, and that’s still a viable strategy in the current market environment.
The bond market is starting to show signs of improvement, which is giving investors confidence to dip back into bonds again. Risk-tolerant investors are heading back to junk bonds or emerging market bonds again, or even taking on longer duration to extract more yield.
However, some advisors say it’s too soon to dial up the risk. Even with the expectation that the U.S. Federal Reserve will start scaling back its rate hikes, getting short or intermediate bond exposure is still the best option.
“Given that the scope of future interest-rate movements remains unclear, some advisors recommend holding more short- and intermediate-term bonds, which have less interest-rate risk than longer ones,” a CNBC article noted. “The extent to which investors do so depends on their timeline for their funds.”
2 Options to Consider
Vanguard has a pair of exchange traded fund (ETF) options to get short or intermediate exposure. For the former, consider the Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH).
Limiting duration amid rate hikes is ideal with a fund like VCSH, which 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 track the performance of the Bloomberg U.S. 1-5 Year Corporate Bond Index, which 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.
For bond investors seeking more yield, there’s the Vanguard Interim-Term Corporate Bond ETF (VCIT). Corporate bonds can give bond investors more yield, albeit more risk, so if anything beyond a 10-year maturity doesn’t fit in an investor’s risk profile, VCIT is ideal for this type of targeted exposure. As mentioned, VCIT presents a viable option for investors who still want to obtain higher yields that short-duration bonds can’t offer.
Overall, the fund seeks to track the performance of a market-weighted corporate bond index with an intermediate-term dollar-weighted average maturity. The fund employs an indexing investment approach designed to track the performance of the Bloomberg U.S. 5–10 Year Corporate Bond Index, which includes U.S. dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies, with maturities between five and 10 years.
For more news, information, and analysis, visit the Fixed Income Channel.