Rising rates and yields are making it a difficult environment for bonds to prosper. However, investors’ portfolios shouldn’t be completely devoid of bonds.

Despite bond prices faltering amid Fed tightening, there are some positives in the debt market. For example, credit quality is stronger in the U.S. after shaking off the effects of the ongoing pandemic.

“You may have read that bonds have performed poorly as the Federal Reserve tightens monetary policy,” a MarketWatch article says. “That’s only half the story. Credit quality in the U.S. is strong — defaults are rare. Nearly all bond issuers are making interest payments on time.”

One option to get bond exposure in the current market and to limit rate risk is the Vanguard Short-Term Treasury ETF (VGSH). With short duration in focus, VGSH offers exposure to short-term government bonds, focusing on Treasury bonds that mature in one to three years.

Overall, VGSH:

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

A Total Bond Solution

Investors who don’t know where to begin to get bond ETF exposure can start with an aggregate option. Vanguard specifically has the Vanguard Total Bond Market Index Fund ETF Shares (BND).

BND seeks the performance of the Bloomberg U.S. Aggregate Float Adjusted Index, which represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States, 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.

As mentioned, bond investors can use BND as a traditional hedging component when the equities market goes awry. Short-term traders can also use the ETF given its dynamic ability to be bought and sold quickly in the open market.
