Despite the heavy dose of market uncertainty swirling in the capital markets, bonds rose during the month of January. It’s an ideal entry point for prospective bond investors looking to attain exposure.
The early beginning of a new presidential administration adds to this uncertainty. Furthermore, the Federal Reserve could be facing an inflection point with interest rates. It may be opting to pause in its latest meeting instead of instituting more rate cuts.
“The near-term and medium-term macro outlook is exceptionally murky given the lack of clarity around policy,” said Michael de Pass, global head of rates trading at Citadel Securities. “We are in a time of great uncertainty and likely high [volatility. So] markets are going to cover big and broad ranges.”
The bond market is deciding how to react to the current transition. So this is an opportunity to get core exposure via passive funds like the Vanguard Total Bond Market Index Fund ETF Shares (BND). The fund is an ideal complement for an equites portfolio as a stand-alone product for bond exposure. It offers exposure to a wide spectrum of public, investment-grade, taxable, fixed income securities, as well as mortgage- and asset-backed securities in the U.S. This includes government, corporate, and international-dollar-denominated bonds.
Given its broad diversification, BND can serve as the 40% core bonds in a traditional 60/40 portfolio split. That’s opposed to holding individual bonds where an investor might be too concentrated in one corner of the vast bond market.
Get Active to Counter Uncertainty
With uncertainty still ahead for the bond market, one way to ease the anxiety is to get active management. This is available via the Vanguard Core Bond ETF (VCRB). The active component of VCRB essentially means the bond holdings of the fund rest in the hands of skilled professionals. In this case, it’s the Vanguard Fixed Income Group.
Furthermore, VCRB is a cost-effective option. That’s due to its 0.10% expense ratio. That should quell any fears that active funds might be deemed too expensive. With Vanguard’s Fixed Income Group at the helm, they can adjust holdings of VCRB based on current market conditions. That allows for flexibility in volatile times, as opposed to BND.
Like the passive BND, VCRB also focuses on the U.S. investment-grade bond market. In addition to U.S. Treasuries, the fund extends its exposure to other fixed income assets for diversification, including mortgage-backed securities and corporate securities.
For more news, information, and strategy, visit the Fixed Income Channel.
