Morningstar favors 2 Vanguard Short-Term Bond ETFs


In a bond market environment where interest rates are rising, short duration has been the default move. Morningstar highlighted the best short-term bond funds for investors to consider as inverted yield curves warn of a possible recession.

Among the top bond funds were two Vanguard exchange-traded funds (ETFs) that limit duration. For exposure to corporate bonds, there is the Vanguard Short-Term Corporate Bond Index Fund ETF-Shares (VCSH).

VCSH seeks to track the performance of a market-weighted index of corporate bonds with a short-term, dollar-weighted average maturity. The Fund employs an index investment approach designed to track the performance of the Bloomberg US 1-5 Year Corporate Bond Index.

This index comprises US dollar denominated investment grade fixed income taxable securities issued by industrial, utility and financial companies with maturities ranging from one to five years. VCSH also has a low expense ratio of 0.04%.

“The tight focus on corporate credit should position this fund to better capture market rallies than most of its peers in the Morningstar category without pushing it too far into risky territory,” Morningstar analyst Lan Anh Tran wrote in a comment . “Most of its wealth is invested in A- or BBB-rated bonds, while its peers can load up on AAA-rated government bonds instead.”

Exposure to treasury bills

For safer debt havens, consider the Vanguard Short Term Treasury ETF (VGSH). With a focus on short duration, VGSH is a premium option that offers exposure to short-dated government bonds and focuses on maturities of one to three years.

Given the uncertainty in the current market environment, this is an ideal option. Bonds can provide investors with a safe haven against stock market volatility, while short-term bonds limit the risks of potential interest rate hikes that can deprive investors of fixed income opportunities.

“This is a conservative portfolio with minimal credit risk as Treasuries are backed by the full confidence and creditworthiness of [the] US government,” wrote Morningstar analyst Neal Kosciulek in a comment. “Interest rate risk is the primary driver of its performance, but given its focus on short-end bonds, even that is muted.”

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