Get more yield with these short-term bond ETF options


Recession fears amid runaway inflation and rising rates are pushing bond yields higher. For optimistic bond investors, this doesn’t sound like good news, but for yield-seeking bond investors, it’s music to their ears.

However, that doesn’t mean optimistic bond investors will be left behind. A forgettable 2022 for the bond market could give way to a brighter 2023, especially if the US Federal Reserve can fight inflation while tightening monetary policy without hurting economic growth.

“It took a historic sell-off, but the bond rout may finally be over,” Lawrence C. Strauss wrote in Barrons. “Yields also look plump enough to turn attractive again.”

“A two-year Treasury now gives you 4.1%, a return not seen since 2007 until very recently,” Strauss added, noting an increase in short-term Treasury yields not only of safe-haven government debt, but also corporate bonds. “High-quality bonds issued by companies like AT&T (ticker: T) and Bank of America (BAC) yield over 5%. Go a little deeper on the risk spectrum and you can get 7% quality preferred stock with fixed interest payments.

2 short-term bond ETF options

Vanguard has a pair of options to consider when it comes to mitigating interest rate risk through exposure to short-term bonds. Investors who want to stick with safe haven treasuries can consider the Vanguard Short Term Cash ETF (VGSH).

With a short duration, VGSH is a prime option to consider. This ETF offers exposure to short-term government bonds, focusing on treasury bills that mature in one to three years.

This may be an ideal option, given the uncertainty of the current market environment. Bonds can offer investors a safe haven from stock market volatility, while short-term bonds limit the risks of potential rate hikes that can deprive investors of fixed income opportunities.

Overall, VGSH:

  • Seeks to provide current income with moderate price fluctuation.
  • Invests primarily in high quality US Treasury bonds (investment grade).
  • Maintains a dollar-weighted average maturity of one to three years.

For a short duration option on corporate bonds to get even more yield, bond investors can opt for the Vanguard Short Term Corporate Bond ETF (VCSH), which seeks to track the performance of a market-weighted corporate bond index with a dollar-weighted short-term average maturity. The fund uses an index investing approach designed to track the performance of the Bloomberg US 1-5 Year Corporate Bond Index.

This index includes taxable US dollar-denominated, investment-grade, fixed-rate securities issued by industrial, utilities and financial companies, with maturities between one and five years. Under normal circumstances, at least 80% of the fund’s assets will be invested in bonds included in the index.

For more news, insights and strategy visit the Fixed income channel.


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