It’s easy to draw in fixed income investors to long-term bonds with their yield. If they don’t want a potentially bumpy rate-risk ride, they could consider options on the yield curve’s front end.
A Morningstar article, 3 Reasons Not to Bet on Long-Term Bonds, noted why betting on the front end may be more beneficial than the back end. As the article noted, short-term bond funds can be “easier to use from a portfolio construction perspective.” And financial theorist William Bernstein said, “it’s helpful to separate asset classes into two categories: risky assets that generate better returns and safe assets that have lower returns.”
Capital markets are hopeful for a rate cut. But the Fed always reserves the right to pivot if inflation numbers don’t match its expectations. Rate cuts may be a slow, steady drip as opposed to a running stream in the next year or so.
“Thus, muddying the waters by betting on price gains from longer-term bonds can be counterproductive,” Morningstar added.
Investors looking to add short-term bond exposure can use the Vanguard Short-Term Bond Index Fund ETF Shares (BSV ). The fund seeks to track the performance of the Bloomberg U.S. 1–5 Year Government/Credit Float Adjusted Index. This index includes a diverse array of bond exposures. That includes all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international-dollar-denominated bonds that have maturities between one and five years and are publicly issued.
Tailor Short-Term Exposure
BSV provides investors with a broad spectrum of short-term debt. But there are other options available for the more discerning investors who want tailor their exposure to specific types of debt. Using other Vanguard products, investors can opt for short-term exposure to Treasury notes or corporate bonds.
For safe-haven Treasury options, consider the Vanguard Short-Term Treasury ETF (VGSH ). This ETF offers ideal exposure to short-term Treasury notes. It focuses on maturity dates that fall within the one- to three-year range.
Investors looking to extract more yield if they wish to accept more credit risk can consider the Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH ). It seeks to track the performance of the Bloomberg U.S. 1-5 Year Corporate Bond Index. This 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.
For more news, information, and analysis, visit the Fixed Income Channel.
