Investors may be anxious with potential short-term volatility on the horizon. But opportunities do exist in the fixed income space. Brian Quigley, portfolio manager of the Vanguard Fixed Income Group, joined a VettaFi Q4 Fixed Income Symposium to discuss these opportunities.
A forthcoming election and the Federal Reserve’s ongoing balancing act with monetary policy easing can generate volatility in the bond market. With the S&P 500 continuing to push higher, however, certain corners of the bond market should thrive, such as corporate bonds.
“We think as long as the U.S. and the Fed are able to avoid outright recession, corporate bonds should be able to continue to perform,” said Quigley, noting that fundamentals look strong.
To avoid going too short or long on duration in corporate bonds, consider the Vanguard Interim-Term Corporate Bond ETF (VCIT ). It’s a median option to balance yield and rate risk. Intermediate bond offerings can offer this median level of exposure. 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.
With the expectation of mortgage rates dropping amid rate cutting, mortgage-backed securities are another alternative. Even with impending short-term volatility, the Vanguard Mortgage-Backed Securities Index Fund ETF Shares (VMBS ) is worthy of consideration.
“We’ve actually used the MBS sector as a way to position for increased volatility,” Quigley added. “So we’ve gone underweight the most negatively convex parts of the MBS market. And again, looking for volatility around this time period around the election year-end to then reestablish positions in those parts of the MBS sector.”
Taking Active Measures
Because of the heightened volatility in the interim, active management is always an option. Portfolio managers have the ability to add or subtract from existing holdings to maximize opportunities in the market. To that end, Vanguard has a few active funds to consider: the Vanguard Core Bond ETF (VCRB ) and the Vanguard Core-Plus Bond ETF (VPLS ).
VCRB focuses on the U.S. investment-grade bond market. In addition to U.S. Treasuries, the fund extends its exposure to other fixed income assets for diversification, which includes mortgage-backed and corporate securities. On the other hand, VPLS adds exposure to riskier credit profiles such as emerging market debt. But like VCRB, its active strategy can help temper risk.
“The differences between core and core plus are really in what we call ‘plus sectors,’ so, high yield corporates, high yield EM,” Quigley explained. “We generally take higher exposure in the core-plus strategy as compared to … the core bond fund is going to more closely mimic the Bloomberg AG. It’s going to be much higher exposure to investment-grade sectors, a little bit higher up in the quality spectrum.”
So while market volatility may induce angst among fixed income investors, there are opportunities that exist and more specifically, Vanguard funds that can fit into any risk profile. For a full list of Vanguard’s fixed income ETFs and how they can fit into an investor’s portfolio, click here.
For more news, information, and analysis, visit the Fixed Income Channel.
