It’s difficult to have the discipline to stick to a strategy when bond markets are following stock markets into a sea of red. However, there are ways to get bond exposure in the current market.
One way is to go short in order to mitigate credit risk. As more rate hikes are expected as the U.S. Federal Reserve tightens monetary policy, an ETF to consider is the Vanguard Short-Term Treasury ETF (VGSH ). This ETF offers exposure to short-term government bonds, focusing on Treasury bonds that mature in one to three years.
It can be an ideal option given the current market environment where uncertainty exists. Bonds can offer investors a safe haven against stock market volatility, while short-term bonds limit the risks of potential rate rises that can rob investors of fixed income opportunities.
Overall, VGSH:
- Seeks to provide current income with modest price fluctuation.
- Invests primarily in high-quality (investment-grade) U.S. Treasury bonds.
- Maintains a dollar-weighted average maturity of one to three years.
Get Inflation Protection
Another option is to add the component of Treasury inflation-protected securities (TIPS) to short-term Treasury notes. This is available via the Vanguard Short-Term Inflation-Protected Securities Index Fund ETF Shares (VTIP ).
VTIP seeks to track the Bloomberg U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Year Index performance. The index is a market capitalization-weighted index that includes all inflation-protected public obligations issued by the U.S. Treasury with remaining maturities of less than five years.
The manager attempts to replicate the target index by investing all, or substantially all, of its assets in the securities that make up the index, holding each security in approximately the same proportion as its weighting in the index.
- Seeks to track an index that measures the performance of inflation-protected public obligations of the U.S. Treasury that have a remaining maturity of less than five years.
- Designed to generate returns more closely correlated with realized inflation over the near term and offer investors the potential for less volatility of returns relative to a longer-duration TIPS fund.
- Given its shorter duration, the fund can have less real interest rate risk and lower total returns relative to a longer-duration TIPS fund.
- Invests in bonds backed by the full faith and credit of the federal government and whose principals are adjusted semi-annually based on inflation.
- Can provide protection from inflationary surprises or ”unexpected inflation.”
For more news, information, and strategy, visit the Fixed Income Channel.
