Unsure About Bonds? Get Active and Short Duration With This ETF

With interest rates rising, the common refrain in the capital markets is to keep duration short. Investors can also consider adding an active management component to help ease fears of more bond volatility.

Bonds have been seemingly in lockstep with stocks for the first half of 2022 as inflation fears have rattled both asset classes. Now, with recession fears looming, investors appear to be ready for safe haven assets such as bonds again.

However, inflation fears continue to remain a concern, which is expected to reveal more U.S. Federal Reserve tightening through the second half of 2022. As such, volatility has been returning to the bond markets again.

“Fresh evidence of accelerating inflation rattled bond markets anew on Wednesday (July 13), sparking large swings in Treasury yields as traders shifted their bets on how the Federal Reserve and the economy might respond,” a Wall Street Journal report said.

“Treasury yields, which rise when bond prices fall, jumped immediately after the government released new consumer-price index data, which showed broad-based inflation reaching another four-decade high,” the report added.

Given this, an active option is worth considering. The strategy puts investment management in the hands of professionals in what could be a tricky bond market for the rest of 2022.

An Active Option

An active option to consider while keeping duration on the short side is the Vanguard Ultra-Short Bond ETF (VUSB). It can be an ideal option over going with a money market fund in order to get a more competitive yield offering.

With its low 0.10% expense ratio, VUSB’s investment objective is to seek to provide current income while maintaining limited price volatility.

Highlights of VUSB:

  • 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.
  • 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.

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