Shorten Duration to Prepare for Potentially Volatile October | ETF Trends

A September drawdown could be a harbinger of even more volatility to come in October, giving fixed income investors more reason to prepare by shortening debt duration.

Rising yields have been bringing heavy volatility to the stock market indexes as of late. Inversely, a drop in yields could bring bond prices back up as investors eye earnings season in October.

“Bond yields appear to be preparing for an eventual pull back by the Fed while equities could rebound briefly on upcoming strong earnings reports,” said Sit Investment Associates senior portfolio manager Bryce Doty.

“October can often be a volatile month for financial markets as companies acknowledge they can’t all make their original forecasts for the year,” added Doty.

A Pair of ETFs to Keep Duration Short

Keeping duration short can prevent bonds from experiencing interest rate risk. The Federal Reserve is already eyeing 2022 for potential rate hikes, and as such, ETFs like the Vanguard Short-Term Bond Index Fund ETF Shares (BSV) are worth considering.

BSV seeks to track the performance of the Bloomberg U.S. 1–5 Year Government/Credit Float Adjusted Index. This index 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.

All of the fund’s investments will be selected through its sampling process, and at least 80% of its assets will be invested in bonds held in the index.

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.

For even shorter duration, there’s the Vanguard Ultra-Short Bond ETF (VUSB). With its low 0.10% expense ratio, VUSB’s investment objective is to seek to provide current income while maintaining limited price volatility.

The fund invests in a diversified portfolio of high-quality and, to a lesser extent, medium-quality fixed income securities. It offers a dollar-weighted average maturity of zero to two years. The fund is designed to give investors low-cost exposure to money market instruments and short-term high-quality bonds, including asset-backed, government, and investment-grade corporate securities.

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