Whether it’s due to a correction or potential recession, the stock market is certainly experiencing a heavy dosage of volatility. Given this, it’s an ideal time to add bonds, especially if they are poised to outperform stocks over the next 10 years.
The stock market, propelled by the hype around big tech stocks centralized on the artificial intelligence theme, could be reaching exorbitant levels. Vanguard is forecasting that bond returns could outpace stocks in the next decade.
“Vanguard recently forecast annual U.S. stock returns over the next decade of 3.4% to 5.4%. By contrast, Vanguard’s outlook for U.S. bonds is a rosier 4.6% to 5.6%, according to the firm’s midyear outlook published last month,” a Barron’s article noted.
Vanguard posits that the cyclically adjusted price-to-earnings ratio or the Shiller P/E has been rising above its long-term average for the last 10 years. At some point, market physics will take effect. And what comes up must subsequently fall. That could lead to lackluster returns the next 10 years relative to the previous 10.
If that’s the case, one option would be to consider adding corporate bonds. As the Fed cuts interest rates, fixed income investors can still attain yield while also reaping the benefits of price appreciation. Furthermore, lower interest rates can benefit the bottom line for corporations by way of lower debt service costs.
One ETF option to balance yield and mitigate rate risk in corporate bonds is an option such as the Vanguard Intermediate-Term Corporate Bond ETF (VCIT ). This fund tracks the Bloomberg U.S. 5-10 Year Corporate Bond Index. That index includes U.S.-dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies. It has maturities of between five and 10 years. Its 30-day SEC yield is at 5.07% as of August 5.
2 More Corporate Bond Options
The Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH ) seeks to track the performance of a market-weighted corporate bond index with a short-term dollar-weighted average maturity. It employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. 1-5 Year Corporate Bond Index.
The Vanguard Long-Term Corporate Bond Index Fund ETF Shares (VCLT ) tracks the performance of the Bloomberg U.S. 10+ 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 greater than 10 years.
All three funds feature a low expense ratio of 0.04%.
For more news, information, and analysis, visit the Fixed Income Channel.
