Yield may be the prime motivator for adding exposure to bonds. But fixed income investors should also look to mitigate default and rate risk. Vanguard has a pair of short-term bond funds that do just that while adding yield in the current market environment.
The Vanguard Short-Term Treasury ETF (VGSH ) was featured in a recent 7 Best Vanguard Bond Funds to Buy article in U.S. News. The fund tracks the Bloomberg US Treasury (1-3 Y) index, maintaining exposure to high-quality (investment-grade) U.S. Treasury bonds. In spite of the concentrated focus on safe-haven Treasury debt, fixed income investors aren’t sacrificing yield for the safety of government bonds. The fund’s 30-day SEC yield as of July 19 is 4.70%. It has a low expense ratio of 0.04%.
As mentioned, VGSH’s focus on shorter maturity dates highlight the risk mitigation in credit and rate risk.
“Investors need to understand the two main types of risk inherent in fixed income investing before selecting a bond fund,” said Chris Tidmore, senior manager at Vanguard’s Investment Advisory Research Center. “Bond funds with long-term maturities are more sensitive to changes in interest rates, while a lower credit quality in the underlying bonds also impacts the riskiness of a particular fund.”
As U.S. News pointed out, the fund has the ability to “minimize both default and interest rate risk by only holding U.S. Treasury bonds with maturities of one to three years,” staying true to its fund description. Its duration also allows the fund to be less susceptible to interest rate moves.
“With an average duration of just 1.9 years, a 100-basis-point hike in interest rates would only cause this ETF to lose around 1.9% in NAV, all else being equal,” U.S. News added.
Extract More Yield
Fixed income investors looking to extract more yield while also getting exposure to short-term debt may want to consider corporate bonds. Hesitant investors who are concerned about credit quality can also stick to investment-grade debt. That said, one fund worth considering is the Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH ).
VCSH seeks to track the the performance of the Bloomberg U.S. 1-5 Year Corporate Bond Index. The index includes U.S.-dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies, with maturities between one and five years. As of July 19, the fund has a 30-day SEC yield of 5.13% paired with a low expense ratio of 0.04%.
For more news, information, and analysis, visit the Fixed Income Channel.
