Fixed income funds are aplenty in the ETF world, but in today’s market, it’s necessary to get strategic as opposed to simply throwing darts at a board of bond ETFs. A pair of ETFs an investor may want to consider for core as well as short-term exposure are the Vanguard Total Bond Market Index Fund ETF Shares (NasdaqGM: BND) and the Vanguard Short-Term Bond Index Fund ETF Shares (NYSEArca: BSV).
BND gives investors that core bond exposure that spans across a variety of debt issues that fall within the investment-grade category.
“So, I like this fund because it offers broad exposure to the U.S. investment-grade bond market,” said Alex Bryan, Morningstar’s director of passive strategies research in North America. “It weights its holdings based on market value, which tends to tilt it toward really high-quality government bonds and agency mortgage-backed securities.”
The fund also focuses on the highest-rated debt so investors are getting that quality exposure.
“About 70% of its portfolio is invested in AAA rated debt. So, those bonds tend to do well in environments when stocks don’t do very well,” Bryan said. “There’s not a lot of credit risk here. And to the extent that interest rates go down further, that can provide some capital appreciation here. I think this is a really good portfolio because it’s really well diversified across different sectors, and it doesn’t have a lot of issuer risk in it. So, I think if you’re looking for a way to diversify away from stock risk, this can provide a nice defensive counterweight to that.”
Too much exposure to bonds can open up investors to duration risk so a short-term bond funds like BSV is a prime option.
“So, this fund offers exposure to the short end of the investment-grade market, invest in bonds maturing between one to five years,” said Bryan. “It owns both government as well as corporate bonds. Like the Vanguard Total Bond Market ETF, it is very conservative. Most of the portfolio is parked in AAA rated securities. But I think this is a particularly attractive option if you are looking at the yield curve and thinking that long-term bonds currently may not be offering very good compensation for their additional interest-rate risk. So, if that’s a concern, or if you need money in a couple of years, this is a really good option to consider.”
“It tends to be less sensitive to changes in interest rates than the broader bond market,” Bryan added. “So, that means that if interest rates were to ever go up, which presumably at some point, they will, these bonds tend to lose less of their value than longer-term bonds. So, this is a safer option than a broad bond market fund, which might make it a really good option if you are a bit more risk averse.”
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