Minimize Duration Risk in Corporate Bonds with the VCSH ETF

Fixed income investors don’t have to venture too far out onto the yield curve in order to extract yield. They can do so with short-term corporate bond funds that minimize duration risk. One prominent example is the Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH).

While corporate bonds may be subject to more credit risk than their government debt counterparts, they’ve been surprisingly steady during the pandemic.

“Corporate bond markets have proven remarkably resilient in the face of the sharp contraction caused by the Covid-19 pandemic,” a Forbes article said. “Bond issuance increased substantially in the last week of March 2020 and has remained substantially above average pre-pandemic levels. For example, between March and June 2020, $502 billion of corporate bonds were issued—compared to just $151 billion in 2019 and $204 billion in 2018.”

VCSH 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 Barclays U.S. 1-5 Year Corporate Bond Index.

This index 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. Under normal circumstances, at least 80% of the fund’s assets will be invested in bonds included in the index.

“VCSH offers exposure to investment grade corporate bonds that fall towards the short end of the maturity spectrum, thereby delivering a moderate amount of credit risk but limiting exposure to rising interest rates,” an ETF Database analysis suggested. “Like most Vanguard ETFs, VCSH is among the most cost-efficient in its ETFdb Category. VCSH might be useful for investors looking to enhance fixed income returns through additional credit risk but also interested in shortening up effective duration.”

VCSH Chart

An Alternative to Equities?

Inflation fears have been causing the equity markets to flux up and down with volatility.

Bond funds like VCSH could serve as an alternative to equities if investors are unwilling or unable to handle the market movements.

“Those who don’t want to take the risk of investing in equities, as well as want reasonable returns, can go for corporate bonds,” a ValueWalk article explained. “Such bonds carry more credit risk than government or agency-backed bonds, but are less risky than equities. Moreover, you can also invest in a portfolio of these bonds through mutual funds. To help you choose, detailed below are the top ten corporate bonds funds.”

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