Vanguard Launches an Active Ultra-Short Bond ETF, 'VUSB'

Vanguard today introduced its first active bond ETF, managed by its in-house fixed income team. The Vanguard Ultra-Short Bond ETF (VUSB) offers a low-cost, diversified option for investors seeking income and limited price volatility. The ETF, which is listed on the Chicago Board Options Exchange (Cboe), has an expense ratio of 0.10%, compared to a categorical average of 0.22%.

The “Vanguard Ultra-Short Bond ETF offers the features of an ETF structure for investors seeking an option for anticipated cash needs in the range of 6 to 18 months,” said Kaitlyn Caughlin, head of Vanguard Portfolio Review Department. “An ultra-short strategy bridges the gap between money market funds offering a stable share price and short-term bond funds, which are meant for longer investment time horizons.”

VUSB offers a similar strategy to that of the $17.5 billion actively managed Vanguard Ultra-Short-Term Bond Fund, which debuted in 2015. Both the fund and the new ETF invest in diversified portfolios consisting of high-quality and, to a lesser extent, medium-quality fixed income securities, including investment-grade credit and government bonds. However, the ETF also provides investors and advisors the flexibility to trade at intraday market prices.

Like the existing Ultra-Short-Term Bond Fund, this new ETF is co-managed by Samuel C. Martinez, CFA, Arvind Narayanan, CFA, and Daniel Shaykevich. With the addition of VUSB, Vanguard now offers 20 U.S.-domiciled fixed income ETFs, representing more than $300 billion in client assets.

Keeping the Active Run Going

Rich Powers, Vanguard’s Head of ETF and Index Product Management, explained that the firm has a long history with actively managed fixed income products, with a team that manages some $900 billion in assets. “So we’ve extended the capabilities that they offered on mutual fund side into the ETF side,” he said.

The ETF structure offers several benefits, said Powers, such as the ability to enter the fund at a lower price point. At launch, VUSB costs just $50/share, compared to $3,000/share for the comparable mutual fund. Plus, he added, “nearly all ETF platforms offer trading commission-free,” as compared to mutual funds platforms, which assign a fee to buy and sell funds. Lastly, there’s the benefit of intraday ability to transact in the ETF, as compared to the once-a-day transaction window at 4 PM.

Addressing active management’s advantage in fixed income, Powers notes that there really isn’t a good index-based proxy for this market segment, and those that exist tend to be oriented toward Treasuries. “If you go down that route, though, then you are forgoing the opportunity for a little more return by not accessing corporate or asset-backed securities that are available in this marketplace. So by launching this [ultra short-term bond ETF]as an active strategy, we give portfolio managers the flexibility to lean into areas of the market where the opportunities exist.”

Fitting ‘VUSB’ in the Right Spot

Powers explains that VUSB is not a substitute for money market funds. Rather, “money market funds have a very specific role around wanting to maintain principal stability for near-term cash feeds. In the case of this product, if the advisor is thinking of tiering out the near-term liquidity for their clients, they might have an allocation to money markets for their near term needs; and there are liquidity needs in the 2-3 year range, which is where a conventional short-term bond fund would be used. Then there’s probably another bucket where the client has a need in the 6-18 month window, and our product could fill that need.”

One distinguishing characteristic of VUSB is its one-year duration. “That’s a bit longer than what you see in the rest of the competitive set,” said Powers. “If you have a duration shorter than a year, then your interest rate sensitivity is less than your credit spread sensitivity. So by picking a spot on the curve at one year, we’re able to have both the interest rate sensitivity and the credit spread sensitivity equal. So that in a falling rate environment, the investors get the benefit of rates falling and prices increasing.”

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