The bond market has been showing its resilience despite the latest stock market correction. Moving forward, investors may want to keep investment-grade options close, with a few from Vanguard to consider.
"Bonds have been doing their job during the stock market’s recent sell off," Barron's reported. "They should continue to deliver going forward—although investors may need to flip 2024’s playbook, focusing on high-quality bonds over junk."
That concentrated focus on high-quality is imperative. That's especially the case nowadays, given the increasing divide between the yields of investment-grade bonds relative to the riskiest bonds.
“Growth concerns are driving the Treasury market more than inflation concerns,” wrote Schwab fixed-income strategists Cooper Howard and Collin Martin in a note Wednesday. “That was evident last week as the University of [Michigan's five- to 10-year] inflation expectations reading rose to its highest level since 1993, but the 10-year yield only rose four basis points given the drop in consumer sentiment.”
With tariffs and inflation adding enough market uncertainty, it's wise to take a defensive stance when it comes to stocks as well as bonds. Again, the optimal strategy is to continue focusing on quality.
“Focus on quality and value in your portfolio—in both stocks and fixed income,” confirmed Chief Market Strategist Callie Cox.
Passive & Active Options
For a passive complement to a stock market portfolio, an ideal option is the Vanguard Total Bond Market Index Fund ETF Shares (BND). It's a simple 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 added flexibility in today's market uncertainty, investors can opt for an active ETF with core exposure via the Vanguard Core Bond ETF (VCRB). The ETF 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.
