Investors who do not want to adjust their risk profile should try to shorten the duration of their bond portfolio. Short-term bonds pay less interest than longer-term bonds, but have less potential for capital loss when interest rates rise. Consider bonds with higher yields, such as B. high yield (junk bonds) or investment grade corporate bonds or ETFs that hold them.
Note: VAB is roughly half the short-term bonds, but has a healthy number of bonds that mature in five to 20 years or more. Vanguard’s popular Asset Allocation ETFs, along with U.S. and overseas equivalents, hold VAB as a major part of their domestic fixed income securities. Most of the corresponding AA ETFs from iShares, Horizons and BMO are in the same boat.
I was therefore interested in the announcement by Vanguard’s US parent company that a short-term actively managed bond ETF is addressing some of these concerns. The Vanguard Ultra Short Bond ETF (VUSB) invests primarily in bonds with a maturity of zero to two years. It is considered low-risk with a MER of 0.10%. According to Matthew, spokesman for Vanguard Canada, there are no immediate plans to launch the equivalent in Canada Gierasimczuk. Of course, Canadians are free to buy the US dollar equivalent, just like any foreign ETF traded on American exchanges. Just be aware of the added layer of currency risk.
Can funds like this one allay the above concerns, or is it better for investors to keep some of their cash equivalents in short-term GICs or highly liquid, relatively high-yielding daily interest savings accounts?
ETF all-star panelist Ben Felix of PWL Capital in Ottawa says this to VUSB: “I don’t think a fund like this can replace a high yield savings account or GIC as its price can fluctuate. If someone has a steady need for cash, this may not be ideal. “
According to Felix, VUSB’s investment objective is to provide ongoing income while limiting price volatility. It invests in a diversified portfolio of high quality and, to a lesser extent, mid-sized fixed income securities and is expected to maintain a US dollar weighted average maturity of 0 to 2 years. It invests in money market instruments and short-term high quality bonds, including asset-backed, government and investment-grade corporate stocks.
“Although short-term bond funds tend to have a higher return than money market funds, their share price fluctuates,” says Felix. “Because the Ultra Short Bond Fund exposes investors to a major risk, the Fund should not be viewed as a substitute for a money market fund. In addition, interest rate hikes can cause the prices of the bonds in the portfolio to fall, and thus the share price of the fund. “
Still, Felix isn’t too concerned about rising interest rates. “Bonds are never a good place to find cash. When interest rates rise, prices fall and yields rise. Maturities and coupons are reinvested in higher yielding bonds. As long as the bond fund’s duration isn’t too far off the investor’s horizon, it shouldn’t be too bad. “