Right now, the fixed income environment presents a quandary, especially for retirees looking to supplement their income, but one compelling option is short-term bonds via assets like the Vanguard Short-Term Bond Index Fund ETF Shares (BSV).

Short-term bonds can help diversify a fixed income portfolio, while limiting duration risk. With inflationary pressures increasing, the shorter duration limits the damage if interest rates rise in the interim.

“If you’re properly diversified, you’ll have to invest a portion of your money in fixed-income instruments,” a USA Today article said. “But which ones? According to Rotblut, the association’s asset allocation models use short-term bonds and intermediate-term bonds, both of which less sensitive to changes in rates than long-term bonds. In addition, he says CDs, or certificates of deposit, and money market accounts can easily be substituted for a short-term bond allocation.”

BSV seeks to track the performance of the Bloomberg Barclays 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 1 and 5 years and are publicly issued.

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

BSV:

  • Seeks to track the performance of the Bloomberg Barclays 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 1 to 5 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.

BSV Chart

Going Short to Minimize Credit Risk

Retirees should be especially wary of making rash maneuvers in the current market environment. Nevertheless, short-term bond funds can provide an alternate source of income while limiting the impact of rising rates.

“We don’t think investors should be quick to adjust their portfolios to changes in the bond or the stock markets,” Rotblut says. “Even with the recent increase, bond yields are still very low historically.”

“Interest rates and bond prices are inversely related, and bonds with longer maturities experience a larger price effect when interest rates change,” says Jay Abolofia, a certified financial planner with Lyon Financial Planning. “This means, if you believe interest rates will rise in the near future, it may make sense to shorten the duration of your bond holdings. In practice, this could mean replacing longer-term bonds in your portfolio with shorter-term bonds of the same quality.”

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