In a bond market environment where rates are on the move higher, short duration has been the default move. Morningstar highlighted top short-term bond funds that investors should consider as inverted yield curves sound the alarm on a potential recession.
Among the top bond funds were a pair of Vanguard exchange traded funds (ETFs) that limit duration. For corporate bond exposure, there’s the Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH).
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 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. VCSH also comes with a low 0.04% expense ratio.
“Focusing strictly on corporate bonds should position this fund to capture market rallies better than most of its Morningstar Category peers without pushing it too far into risky territory,” Morningstar analyst Lan Anh Tran wrote in a commentary. “The majority of its assets are invested in A or BBB rated bonds, while its peers can load up on AAA-rated government bonds instead.”
Treasury Bills Exposure
For safer haven debt, consider the Vanguard Short-Term Treasury ETF (VGSH). With short duration in focus, VGSH is a prime option to consider, providing exposure to short-term government notes and focusing on maturity dates of one to three years.
It’s an ideal option, given the uncertainty in the current market environment. Bonds can offer investors a safe haven against stock market volatility, while short-term bonds limit the risks of potential rate rises that can rob investors of fixed income opportunities.
“This is a conservative portfolio with minimal credit risk, as Treasurys are backed by the full faith and credit of [the] U.S. government,” Morningstar analyst Neal Kosciulek wrote in a commentary. “Interest-rate risk is the primary driver of its performance, but given its focus on bonds at the short end of the yield curve, even that is muted.”
For more news, information, and strategy, visit the Fixed Income Channel.