2 Options to Take Advantage of a Bond Rally

The Federal Reserve has been on pause with its rate-cutting measures, choosing to see succinct signs that the economy is starting to cool. They could be seeing signs of this manifesting in the economic data as of late as job growth cooled during the month of April. Consumer sentiment is also starting to take a hit as tariffs upended the stock market during the month of April.

“Tariffs were spontaneously mentioned by nearly three-quarters of consumers, up from almost 60% in April; uncertainty over trade policy continues to dominate consumers’ thinking about the economy,” said Joanne Hsu, director of the Surveys of Consumers.

Of course, all of this is good news for the bond market. When the major market indexes are experiencing bouts of volatility, bonds are fundamentally an ideal safe haven.

“Bad news is good news for the bond market," said Zachary Griffiths, head of investment-grade and macroeconomic strategy at CreditSights Inc.

In times of economic uncertainty, it can help investors to attain active exposure, whether it be equities or bonds. Speaking towards the latter, an ideal option for core bond exposure with an inherent active strategy is the Vanguard Core Bond ETF (VCRB B). Active management allows VCRB portfolio managers to adjust the holdings when market conditions deem it imperative.

Furthermore, VCRB mitigates credit risk via diversified exposure to the U.S. investment-grade bond market. However, the actively managed VCRB also extends its exposure to other fixed income assets for diversification, including mortgage-backed securities and corporate securities. The fund harnesses the portfolio management capabilities of the Vanguard Fixed Income Group at a low 0.10% expense ratio.

Active ETFs may not suit every portfolio, making passive core bond funds an ideal option. For those who would rather stick with passive funds to attain broad exposure, an ideal choice would be the Vanguard Total Bond Market Index Fund ETF Shares (BND A-). It’s a simple, cost-effective (0.03% expense ratio) solution for investors looking to construct their portfolio to get a 60/40 stock/bond ratio in the convenience of one ETF.

The fund seeks to track the performance of the Bloomberg U.S. Aggregate Float Adjusted Index. That index represents 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.

For more news, information, and analysis, visit the Fixed Income Channel.