With volatile markets, rising rates, and a sagging economy, it’s not surprising that many investors are becoming more risk-off. Fixed income investors in particular are turning towards investment-grade credit funds and putting more assets into short- and ultra-short-duration strategies.
Volatility and uncertainty have also led many investors to shore up their cash reserves. Short-term investments can not only reduce risk, but they can also help investors remain liquid.
“Short-term credit strategies target bonds with shorter maturities—and therefore lower credit spread volatility risk—than longer-term credit strategies,” according to Amundi. “As a result, short-term credit can better hedge against downside risks, such as the spread-widening environment that may result from the Fed seeking to tighten financial conditions. Short-term credit has offered significantly higher spread per unit of spread duration than longer-term credit.”
Fixed income investors wanting to keep their durations short in the current volatile environment may want to consider the Vanguard Short-Term Bond Index Fund ETF Shares (BSV) and the Vanguard Ultra-Short Bond ETF (VUSB).
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. The fund invests in U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds.
“BSV can be a great safe haven to park assets in volatile markets, and is likely to offer more in terms of yield than comparable funds focusing on T-Bills,” said FactSet’s analyst report.
VUSB, meanwhile, seeks to provide current income while maintaining limited price volatility. 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.
VUSB offers a diversified portfolio of high-quality and, to a lesser extent, medium-quality fixed income securities. The fund is expected to maintain a dollar-weighted average maturity of zero to two years.
“Ultra-short debt ETFs like VUSB can help investors squeeze a little more income out of their portfolios without overloading on risk,” according to FactSet.
For more news, information, and strategy, visit the Fixed Income Channel.