The credit risk profile for corporate bonds has improved. But given the abundance of market uncertainty, it may be best to stick to Treasuries, or for additional yield, municipal bonds.
“Corporate bonds were already expensive relative to Treasuries,” said Tom Graff, chief investment officer with Facet, a financial planning firm. “If we are heading into a recession, spreads need to widen a bit more and corporate bonds would underperform.”
To adhere to safe haven Treasury notes, Vanguard has a trio of funds to consider. Those include the Vanguard Short-Term Treasury ETF (VGSH), the Vanguard Intermediate-Term Treasury Index Fund ETF Shares (VGIT), and the Vanguard Long-Term Treasury Index Fund ETF Shares (VGLT). All funds feature a low 0.03% expense ratio.
Additionally, all three ETFs can be used as stand-alone products, deriving the benefits of each fund. For example, VGSH is ideal for mitigating rate risk, while VGLT is a prime option for yield. VGIT strikes a balance between rate risk and yield with intermediate Treasuries exposure.
Alternatively, investors can also use the trio of funds to mimic a laddering strategy. Pooling all funds together will also bring additional diversification when building a fixed income portfolio that emphasizes Treasuries exposure during these uncertain times.
Muni Options to Ponder
In addition to Treasury notes, investors can also ponder municipal bond options for localized bond exposure. Vanguard has a pair of muni bond ETF options worthy of consideration.
“Treasuries are the ultimate safe haven,” Graff added. He noted that muni options are a safer bet for yield as opposed to fixed income options with a riskier credit profile. “Munis may take time to catch up but you can get a pretty nice tax-free yield while you wait.”
On that note, consider the Vanguard Tax-Exempt Bond ETF (VTEB). The fund tracks the Standard & Poor’s National AMT-Free Municipal Bond Index. This index measures the performance of the investment-grade segment of the U.S. municipal bond market, giving investors only the highest quality issues.
The fund is heavily diversified, with the index including debt issues from state or local governments or agencies whose interests are exempt from U.S. federal income taxes, and the federal alternative minimum tax. Furthermore, for cost-conscious investors, VTEB also features a low 0.03% expense ratio.
If seeking to shorten duration on muni exposure, investors will want to look at the Vanguard Short-Term Tax-Exempt Bond ETF (VTES). The fund tracks the S&P 0-7 Year National AMT-Free Municipal Bond Index. That index aims to balance tax efficiency with tax-exempt yield. For an appropriate level of duration risk, this balance can translate to potentially higher yields than those afforded by competing strategies. Like VTEB, exposure comes with a low 0.06% expense ratio.
For more news, information, and analysis, visit the Fixed Income Channel.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out our podcasts.
Read more commentaries by VettaFi
