Longer Treasury ETFs Could Help if a Recession Occurs This Year

Vanguard has forecasted that inflation will remain sticky, so the U.S. central bank will continue raising rates. But the investment giant also estimates that a recession still won’t hit the U.S. this year. That having been said, while the probability of a deep downturn before year-end is low, it can’t be ruled out. All of this draws attention to Treasury ETFs.

“Recession comes faster than the market anticipates as the labor market quickly deteriorates, and rates fall along the curve, with the short end falling more than the long,” according to Vanguard.

See more: “Consider High-Quality Bonds if a Recession Doesn’t Hit This Year

Currently, the curve is sloping upward, with the 10-year yield around 3%. Credit spreads widen between roughly 150 and 200 bps on economic weakness.

So, investors wanting to hedge against a recession hitting the U.S. in 2023 should consider intermediate and/or long-term Treasury ETFs. Two such ETFs to consider are Vanguard Intermediate-Term Treasury ETF (VGIT) and Vanguard Long-Term Treasury ETF (VGLT).

VIGT targets U.S. Treasury bonds with a dollar-weighted average maturity of 5 to 10 years. VGLT, meanwhile, targets Treasuries with a dollar-weighted average maturity of 10 to 25 years. Both funds have an expense ratio of just four basis points.

VettaFi’s vice chairman Tom Lydon called Vanguard “the Hoover of the ETF industry” for how it’s vacuumed up investor dollars.

“They are just rock solid,” Lydon said. “They have so many choices. They’re low-cost and always very, very dependable.”

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