Amid the Federal Reserve’s interest rate-hiking campaign that it kicked off in 2022, many advisors have turned to cash and cash equivalents bonds. Since cash and short-duration securities are less sensitive to interest rate increases, the strategy has worked so far. However, what worked in the past may not work so well again in the future, and with a recession expected in later 2023 or early 2024, being overweight on cash may not be the best way to go. So, now may be the right time for investors to add more duration exposure to their portfolios.
Vanguard advised that investors should diversify their fixed income allocation across the maturity spectrum by moving away from cash and toward short-term bond strategies or broad, high-quality strategies for longer investment horizons. The best practice is to align the duration of a portfolio allocation with a client’s approximate timeline, especially if money is needed quickly, according to Vanguard. For needs within a year or so, cash remains an appropriate option, while short-term bond funds can work well for needs within the next few years.
“Advisors have long turned to bonds to provide income benefits and to reduce the volatility of their clients’ portfolios,” wrote Todd Rosenbluth, head of research at VettaFi. “While 2022 was a rare example showing that sometimes stocks and bonds can both decline in value, the start of 2023 is a reminder that a healthy stake in both asset classes is often prudent.”
A Range of Maturities
Vanguard has an array of fixed income ETFs that invest across a range of maturities, including the Vanguard Ultra-Short Bond ETF (VUSB ), the Vanguard Short-Term Bond ETF (BSV ), the Vanguard Total Bond Market ETF (BND ), and the Vanguard Long-Term Bond ETF (BLV ).
VUSB invests in a diversified portfolio of high-quality and, to a lesser extent, medium-quality fixed income securities. The fund is expected to maintain a dollar-weighted average maturity of zero to two years.
BSV, meanwhile, invests in U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds with a dollar-weighted average maturity of one to five years.
BND seeks the performance of an index representing a wide spectrum of public, investment-grade, taxable, fixed income securities in the U.S., including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than one year.
BLV seeks to track the performance of an index that includes all medium and larger issues of publicly issued U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds that have maturities of greater than 10 years.
For more news, information, and analysis, visit the Fixed Income Channel.