Nobody can predict what the Federal Reserve will do next, which is why the Vanguard Short-Term Bond Index Fund ETF Shares (BSV) may be an optimal choice in the current market environment.

Short-term bonds can help diversify a fixed income portfolio, while limiting duration risk. With inflationary pressures increasing, the shorter duration limits the damage if interest rates rise in the interim.

“There is a greater probability that interest rates will rise (and thus negatively affect a bond’s market price) within a longer time period than within a shorter period,” an Investopedia article explained. “As a result, investors who buy long-term bonds but then attempt to sell them before maturity may be faced with a deeply discounted market price when they want to sell their bonds.”

“With short-term bonds, this risk is not as significant because interest rates are less likely to substantially change in the short term. Short-term bonds are also easier to hold until maturity, thereby alleviating an investor’s concern about the effect of interest rate-driven changes in the price of bonds,” the article explained further.

BSV seeks to track the performance of the Bloomberg Barclays U.S. 1-5 Year Government/Credit Float Adjusted Index. This index includes all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds that have maturities between 1 and 5 years and are publicly issued.

All of the fund’s investments will be selected through the sampling process, and at least 80% of its assets will be invested in bonds held in the index.

BSV:

  • Seeks to track the performance of the Bloomberg Barclays U.S. 1–5 Year Government/Credit Float Adjusted Index, a market-weighted bond index that covers investment-grade bonds with a dollar-weighted average maturity of 1 to 5 years.
  • Invests in U.S. government, high-quality (investment-grade) corporate, and investment-grade international dollar-denominated bonds.
  • Follows a passively managed, index sampling approach.

A Long-Term Solution

For investors willing to take on additional credit risk via longer duration debt, one ETF to consider is the Vanguard Long-Term Bond Index Fund ETF Shares (BLV). Longer duration debt can give fixed income investors that added dose of yield, particularly during this low-rate environment.

BLV seeks to track the performance of the Bloomberg Barclays U.S. Long Government/Credit Float Adjusted Index. Bloomberg Barclays U.S. Long Government/Credit Float Adjusted Index includes all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds that have maturities of greater than 10 years and are publicly issued.

BSV 1 Year Performance

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