While there are plenty of areas to park capital, the current environment of high inflation could be spooking investors and causing them to sit on the sidelines with cash.

It make sense, given the interest rate risk they could expose themselves to in today’s inflationary environment.

“Some investors have been sitting on the sidelines in cash, waiting for rates to rise. We don’t think that’s a really great strategy,” said Prerna Mathews, vice president, ETF product and strategy, with Toronto-based Mackenzie Investments.

Risk-averse investors could leave the cash in a money market fund, but the trade-off is less-than-stellar yields. Another option to stymie rate risk but still get more yield is short-duration bonds.

“With inflation fears rising and intermediate‑ and long‑term rates appearing likely to increase, the trade-off between yield opportunity and interest rate risk has come into sharp relief,” wrote Steven Kohlenstein (CFA, co‑portfolio manager, short duration income fund) and Cheryl Mickel (CFA, head of the U.S. taxable low duration team and co‑portfolio manager, short duration income fund). “We believe that investors may want to consider a shorter‑duration portfolio in aiming to limit interest rate risk.”

“However, moving to a shorter duration often means sacrificing yield,” they added. “By applying a flexible, multi‑sector approach to managing a low-duration portfolio, we think that the Short Duration Income Fund can help provide a reasonable yield while also controlling interest rate risk.”

An Actively Managed, Short-Duration Option

One option is the Vanguard Ultra-Short Bond ETF (VUSB). With its low 0.10% expense ratio, VUSB’s investment objective is to seek to provide current income while maintaining limited price volatility.

The fund invests in a diversified portfolio of high-quality and, to a lesser extent, medium-quality fixed income securities. It offers a dollar-weighted average maturity of 0–2 years. The fund is designed to give investors low-cost exposure to money market instruments and short-term high-quality bonds, including asset-backed, government, and investment-grade corporate securities.

“The Vanguard Ultra-Short Bond ETF is an actively managed fund that aims to bolster income while minimizing volatility,” an ETF Database analysis says. “The fund invests in short-term fixed income securities with maturities of up to two years, and is designed for those with an investment time horizon of six to 18 months.”

“The portfolio includes asset-backed debt, government issued bonds, and investment-grade corporates,” the analysis adds. “While VUSB skews toward securities issued by high-quality borrowers, the fund also invests in some riskier medium-quality fixed income assets.”

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