Short-Term Bonds Can Provide a Safe Haven Against Stocks | ETF Trends

Another injection of volatility is making its way into the stock market, forcing investors to seek safe havens to minimize risk and smooth out market fluctuations. One way to accomplish this is via short-term bonds, which can help mitigate rate risk from a tightening Federal Reserve.

According to Financial Advisor Magazine, these bonds, particularly the high-quality caliber, can be used “as a refuge from stocks, which are likely to keep falling, according to Erin Browne, a portfolio manager at Pacific Investment Management Co. Two-year Treasuries, investment-grade corporate bonds and tax-advantaged municipal bonds offer higher returns than cash while avoiding the downside that stocks likely still face, Browne, who oversees multi-asset strategies at Pimco, said on Bloomberg Television’s Wall Street Week on Friday.”

“What we’re looking at is fixed-income investments that we think are going to be able to stand the test of time,” Browne said. “It’s a challenging time for investors where you have to skew more toward fixed-income to have the stability of returns.”

2 Short-Term Bond ETF Options

Vanguard has a pair of options to consider when mitigating rate risk via short-term bond exposure. Investors who want to stay with safe haven Treasury notes can consider the Vanguard Short-Term Treasury ETF (VGSH).

With a short duration in focus, VGSH is an excellent option to consider. This ETF offers exposure to short-term government bonds, focusing on Treasury bonds that mature in one to three years.

It can be 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.

Overall, VGSH:

  • 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 a short-duration option in corporate bonds to extract even more yield, fixed income investors can opt for the Vanguard Short-Term Corporate Bond ETF (VCSH), which 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 follow 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. Under normal circumstances, at least 80% of the fund’s assets will be invested in bonds included in the index.

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