Mitigate Rate Risk Via Quality and Diversification With This ETF

With the overall bond market heading lower this year amid rising interest rates, short duration continues to be the focus for fixed income investors. Additionally, getting quality and diversification is also a must, forcing investors to get even pickier with their fixed income portfolio holdings.

Rising rates look to continue to be the U.S. Federal Reserve’s focus, giving bond investors even more reason to shorten duration.

“While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” said Fed chairman Jerome Powell. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

One option in the current market is to get ultra-short exposure via bond funds in order to extract maximum yield in exchange for more credit risk. However, investors should also seek the highest credit quality when considering these funds.

“It’s important to know the types of securities a fund invests in because ultra-short bond funds may experience losses due to credit downgrades or defaults of their portfolio securities,” Investor.gov explained. “Credit risk is less of a factor for ultra-short bond funds that principally invest in government securities. By contrast, if you invest in an ultra-short bond fund that invests in bonds of companies with lower credit ratings, derivative securities, or private label mortgage-backed securities, you’ll generally be subject to a higher level of risk.”

Quality Short-Term Exposure

Fixed income investors looking for diversified options to obtain short duration and high credit quality can opt for the Vanguard Ultra-Short Bond ETF (VUSB). It can be a better option than going with a money market fund in order to get a more competitive yield offering.

With its low 0.10% expense ratio, VUSB’s investment objective is to seek to provide current income while maintaining limited price volatility. The fund also has a 30-day SEC yield of 3.27% as of September 2.

Highlights of VUSB:

  • A diversified portfolio of high-quality and, to a lesser extent, medium-quality fixed income securities.
  • The fund is expected to maintain a dollar-weighted average maturity of zero to two years.
  • Under normal circumstances, the fund will invest at least 80% of its assets in fixed income securities.
  • The fund is designed to give investors low-cost exposure to money market instruments and short-term high-quality bonds, including asset-backed, government, and investment-grade corporate securities.

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