Rather Than Staying in Cash, Check Out These Short-Term Bond ETFs

Rather than staying in cash, fixed income investors may want to make a dash for short-duration bonds via exchange traded funds (ETFs) offered by Vanguard.

“Investors holding cash and waiting for interest rates to rise before buying bonds may be making a significant mistake,” a Yahoo! Finance article noted. “With the Federal Reserve poised to keep interest rates near zero for at least another year, investors should consider purchasing short-term corporate bonds now instead of waiting for rates to rise, according to the Schwab Center for Financial Research.”

Market experts realize that cash does play a vital role in a portfolio. However, it shouldn’t serve as an alternative to fixed income options like short-duration bonds.

“For those tactically waiting for rates to rise before investing in bonds, there is a cost to that strategy: the opportunity cost of compounding the higher yields that are available today in other high-quality investments,” said Collin Martin, a fixed income strategist and director of the Schwab Center for Financial Research in Schwab’s most recent “Bond Insights.”

Two Vanguard ETFs to Consider

For an aggregate short-duration bond ETF, investors can try the Vanguard Short-Term Bond Index Fund ETF Shares (BSV). BSV seeks to track the performance of the Bloomberg U.S. 1-5 Year Government/Credit Float Adjusted Index, which includes 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.

Short-term bonds can help diversify a fixed income portfolio while limiting duration risk. With inflationary pressures increasing, the shorter duration limits the damage if interest rates rise in the interim.

For investors who want to stick with safe haven Treasury notes, there’s the Vanguard Short-Term Treasury ETF (VGSH). 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.

“This ETF offers exposure to short term government bonds, focusing on Treasury bonds that mature in one to three years,” an ETF Database analysis suggested. “As such, interest rate exposure for this product will be towards the low end, giving VGSH safe haven appeal as an asset that avoids both credit risk and interest rate risk.”

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