Shorten Duration in a Down Bond Market With These ETFs | ETF Trends

The current market is certainly confounding investors looking at their bond portfolios and seeing nothing but red. Bonds are supposed to shield a portfolio when the stock market goes awry, but one strategy to employ is to shorten duration.

As a Kiplinger article noted, investors “can look to purchase short-dated bonds that will mature within a few years. While bonds with longer maturity dates – such as 10+ years – often have higher yields, the increase isn’t all that much (because of what is called a flat yield curve). For investors expecting rates to rise, the longer-dated bonds will be hit hardest if rates do rise.”

One option is to opt for exchange traded funds (ETFs) that offer short-duration exposure in one fund. Vanguard has a pair of options to consider, depending on the investor’s preference.

For broad, diversified exposure, there’s the Vanguard Short-Term Bond Index Fund ETF Shares (BSV). The fund seeks to track the performance of the Bloomberg U.S. 1–5 Year Government/Credit Float Adjusted Index, which 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.
  • Has a low expense ratio of 0.05%.

Short Duration in Treasuries

Bond investors who want the safety of government debt can opt for short-duration Treasuries. In the form of an ETF, one fund to consider is the Vanguard Short-Term Treasury ETF (VGSH).

The fund offers exposure to short-term government bonds, focusing on Treasuries that mature in one to three years. Government bonds can offer investors a safe haven against future 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.
  • Has a low expense ratio of 0.04%.

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