While investors have been fixated on yields when it comes to bond exposure, the recent volatility could bring them back to fundamentals. Now is as good a time any to add core bond exposure as the equities roller coaster ride gets underway.
While market experts debate whether we’re in a recession or correction, it’s a reminder for investors to have that counterbalancing effect of bonds in a portfolio. This is especially true when it comes to absorbing market shocks and profound movements, particularly toward the downside.
When it comes to getting core bond exposure, an ideal option is the Vanguard Total Bond Market Index Fund ETF Shares (BND ). The fund is an all-encompassing bond option that can complement an equity portfolio by itself. For example, the fund can serve as the 40% core bonds in a traditional 60/40 stock-bond portfolio split.
Per its baseline fund description, BND seeks to track the performance of the Bloomberg U.S. Aggregate Float Adjusted Index. The fund incorporates a broad spectrum of debt holdings, giving investors additional diversification within their core bond portfolio. The index represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States. These include government, corporate, and international-dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than one year.
Right now, the fund skews heavily toward the safety of U.S. Treasuries, which is where investors should be in the current market environment. If things continue to go awry in the equities market, BND is an ideal complement to equities exposure.
“This conservative risk allocation can help performance during credit shocks,” a Morningstar article said about BND. “For instance, the fund offered superior protection during both the 2008 financial crisis and the March 2020 coronavirus drawdown. However, it can lag when credit risk pays off, such as during the latter half of 2020. Active funds in the category can dip into riskier assets to find pockets of opportunities.”
An Active Core Option
As Morningstar mentioned, active funds can mine for other opportunities in the vast debt market. One option is the Vanguard Core Bond ETF (VCRB ), which also focuses on the U.S. investment-grade bond market to mitigate credit risk. In addition to U.S. Treasuries, the fund extends its exposure to other fixed income assets for diversification, including mortgage-backed securities and corporate securities for maximum yield extraction.
The fund’s 30-day SEC yield as of Aug. 1 is 4.57%. The fund also focuses on intermediate bonds, striking a balance between yield and mitigating rate risk.
VCRB taps into a deep well of portfolio management talent with Vanguard’s Fixed Income Group. Moreover, it does so with a low income expense ratio of 0.10%, which runs counter to the notion that active funds are expensive.
Overall, VCRB is an ideal option for investors seeking active management and core bond exposure in a cost-effective package.
For more news, information, and analysis, visit the Fixed Income Channel.
