In times of uncertainty in the bond market, there’s one thing for certain. And that’s that deciding where to get exposure can be complex. But it doesn’t have to be if fixed income investors decide to take on a multi-ETF strategy.
The worry in the bond market is certainly warranted as the economic data continues to flummox the Fed. While markets are hoping for a rate cut, a strong jobs report could give the central bank pause.
Of course, it’s difficult to pontificate about the market without discussing tariffs and geopolitical tensions. Fixed income investors still yearn for yield. But taking a defensive stance is necessary to absorb any market shocks, like April’s sell-offs.
Furthermore, defaulting to a single strategy of just staying in Treasuries might not work in the current environment. That’s especially the case given the recent downgrade by Moody’s.
“People are worried the independence of the Fed could be eroded to some extent, people are worried that the U.S. administration’s policies have not been friendly to the allies or to the providers of capital for the U.S. market,” said Jason Daw, head of North American rates strategy at Royal Bank of Canada Capital Markets. “This has led the market to believe that (foreign) investors are going to be investing less in the U.S and maybe more in their domestic markets.”
There are various options to ponder in this increasingly complex bond market. So this is where a multistrategy approach can help.
Stacking Short-Term Bond ETF Exposure
Interest rate policy remains in flux. Ultimately, it’s up to the Fed to decide what it wants to do despite political influences via the bully pulpit. With that, fixed income investors can control the controllable by tailoring their bond exposure by stacking various exposure levels. For example, if rate cuts come, they can mitigate rate risk with short-term bonds.
Rather than opt for short-term bonds in just safe-haven Treasuries through single exposure in the Vanguard Short-Term Treasury ETF (VGSH ), investors can further diversify. They can opt to add exposure to corporate bonds, for example, to attain yield. Additionally, they can get a mix of quality/safety and yield with municipal bonds. More specifically, they can opt for the Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH ) and the Vanguard Short-Term Tax-Exempt Bond ETF (VTES ).
Bonds of the Treasury, corporate, and muni variety have their own nuances. So having the exposure for all three can capture upside in one area of the bond market while mitigating risk in another. When it comes to yield, the same can be said for income diversification. Higher yields in one corner of the bond market can be attained if another area falters.
Investors can also use a multi-ETF strategy to tailor their exposure to not only short-term bonds, but intermediate and long-term. Additionally, they can vary their term exposure to a variety of maturity dates by combining short, intermediate, and long-term bonds in a laddering-type strategy.
For the complete suite of bond ETFs that Vanguard provides and how they work with you or your client’s portfolio, click here.
For more news, information, and analysis, visit the Fixed Income Channel.
