Mitigate Credit and Rate Risk With These 3 ETF Options

Short-term bonds can offer the investor an ideal way to mitigate credit risk via an investment-grade focus while also reducing the rate risk that longer-term bond offerings can carry. That said, Vanguard has three options worthy of considering to get short-term bond exposure.

As mentioned, short-term bond funds feature the low rate risk mitigation benefits while investors can take advantage of the current yields before rate cuts eventually occur.

“The main advantage of short-term bonds is their ability to generate current income with relatively low risk,” Morningstar added. For this reason, short-term bonds can be a good choice for many investors’ portfolios.

Rather than handpick individual bond offerings, investors can also opt for an all-inclusive option with the Vanguard Short-Term Bond Index Fund ETF Shares (BSV). With its varied holdings, BSV offers added diversification for a bond portfolio while still maintaining a short-duration profile.

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

Furthermore, BSV comes with a low expense ratio of just 0.04%, highlighting one of the benefits of using ETFs to get bond exposure.

“For most investors, broadly diversified index funds are the easiest and least expensive way to invest in short-term bonds,” mentioned Morningstar.

2 More Options for a Focused Approach

BSV provides investors with a broad spectrum of short-term debt, but there are other options available for the more discerning investors who want a focused approach. That said, investors can opt for short-term exposure to Treasury notes or corporate bonds as Vanguard has options for both; also with a low expense ratio of 0.04%.

For safe haven Treasury options, consider the Vanguard Short-Term Treasury ETF (VGSH). The fund offers ideal exposure to short-term Treasury notes, focusing on maturity dates that fall within one to three years.

Investors looking to extract more yield if they wish to accept more credit risk can consider the Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH). The fund seeks to track the performance of the Bloomberg 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.

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