With the threat of rising interest rates, fixed income investors are opting to shorten duration risk with ETFs like the Vanguard Ultra-Short Bond ETF (VUSB), which has amassed $500 million in assets in just six weeks.

Bond portfolios containing longer duration debt are susceptible to rising interest rates, forcing investors to find alternatives.

This is where ultra-short bonds can strike a balance between money market funds, which can’t offer higher yield, and short-term bond funds, which have higher duration risk. Furthermore, VUSB minimizes credit risk by focusing on more stable, high-quality debt issues.

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 0 to 2 years.

Under normal circumstances, the fund will invest at least 80% of its assets in fixed income securities. 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 Chart

Short on Duration, High on Yield

Having the convenience of short duration bonds gives fixed income investors the dynamic ability to get in and out of positions.

“This is something that we’ve been looking at for some time,” said Vanguard’s Rich Powers during a CNBC interview. “Our investors were increasingly telling us they’d love to have this strategy within the ETF wrapper.”

“I think it’s a product that’s benefiting from the times we find ourselves in,” he said. “It’s certainly not why we launched it. We think this has enduring long-term investment merit. But if you think about the current interest rate environment and where money market yields are relative to, say, short-term bond yields, this product kind of falls nicely between the sweet spot of those two.”

VUSB is able to offer about a 50-basis-point yield on a one-year duration, which makes it an ideal destination for investors to park cash.

“This type of product could be really suitable to pick up that yield when yield is so hard to find today,” Powers concluded.

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