The risk-on sentiment in equities could also be permeating into bonds. According to Reuters, more investors are willing to take on credit risk to attain yield, but there are other exchange-traded fund (ETF) options to consider.
With the anticipation that rate cuts will eventually happen despite the Federal Reserve’s recent pause, more investors appear willing to up the ante on risk. Investors are eyeing the riskiest corners of the corporate debt market to get elevated yield now prior to the Fed loosening monetary policy.
“The U.S. market for one of the riskiest types of corporate debt is resurging this year, as companies cater to investor demand for assets that can lock in high yields for several years ahead of an expected decline in interest rates,” the Reuters report confirmed. It added that “investors are scrambling to get their hands on securities that will pay the current levels of high interest for years to come.”
For the risk averse, however, this narrows the pathways to obtain more yield. Another way is to step out further on the yield curve and stay within corporate debt, but at the same time, maintain a relatively low credit risk profile. With that, long-term corporate bonds of the investment-grade variety could present a compelling option.
A Stand-Alone or Laddering Option
One fund worth considering for this exposure is the Vanguard Long-Term Corporate Bond ETF (VCLT). The fund has a 30-day SEC yield of 5.58%, as of March 18. The ETF tracks the performance of the Bloomberg U.S. 10+ Year Corporate Bond Index. It includes U.S.-dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies, with maturities greater than 10 years.
VCLT can serve as a stand-alone product within an ETF portfolio. Alternatively, for strategic exposure, investors can also use the ETF as part of a bond laddering option, mixing them with short-term and/or intermediate bond ETF products from Vanguard.
For intermediate duration as part of a laddering strategy, there’s the Vanguard Interim-Term Corporate Bond ETF (VCIT). It tracks the Bloomberg U.S. 5-10 Year Corporate Bond Index. That index includes U.S.-dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies. It has maturities of between five and 10 years.
To mix in short-term duration, consider the Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH), which seeks to track the performance of a market-weighted corporate bond index with a short-term dollar-weighted average maturity. This index includes U.S.-dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies, with maturities of between one and five years.
For more news, information, and analysis, visit the Fixed Income Channel.