If cash is king, then short-term fixed income can share the throne in the current market uncertainty, according to notable economist Mohamed El-Erian.
Stocks and bonds had been headed downward together before a summer rally sparked some hope that things could potentially turn around. However, inflation fears are giving way to recession fears as the U.S. Federal Reserve looks to dial up the aggression on its rate hiking policy.
As such, bonds are once again heading to the downside as yields start to climb again. As such, mitigating rate risk is key for prospective fixed income investors by using short-duration debt holdings.
“We need to get out of these distorted markets that have created a lot of damage,” said El-Erian, Allianz’s chief economic advisor. “We are repricing — I don’t think we’re quite there yet, but we’re certainly getting there.”
2 Options for Short-Term Fixed Income
Vanguard has a pair of options to consider when it comes to mitigating rate risk via short-term bond exposure. For investors who want to stay with safe haven Treasury notes, consider the Vanguard Short-Term Treasury ETF (VGSH).
With short duration in focus, VGSH is a prime option to consider. This ETF offers exposure to short-term government bonds, focusing on Treasury bonds that mature in 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.
- Seeks to provide current income with modest price fluctuation.
- Invests primarily in high-quality (investment-grade) U.S. Treasury bonds.
- Maintains a dollar-weighted average maturity of one to three years.
For more diversity beyond Treasury notes, investors can also opt for the Vanguard Short-Term Bond Index Fund ETF Shares (BSV). With more 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.
Highlights of BSV:
- Seeks to track the performance of the Bloomberg U.S. 1–5 Year Government/Credit Float Adjusted Index, a market-weighted bond index that covers investment-grade bonds with a dollar-weighted average maturity of one to five years.
- Invests in U.S. government, high-quality (investment-grade) corporate and investment-grade international dollar-denominated bonds.
- Follows a passively managed, index sampling approach.
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