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3 Short-Term Fixed-Income ETF Strategies

This article was originally published on ETFTrends.com.

Compared to their longer duration counterparts and U.S. equities, short-term bond strategies have been an option for fixed-income investors seeking a return in today's rising rate environs, while also avoiding the volatility of the extended bull run in the stock market. While trade wars continue to cause bouts of volatility in the capital markets, short-term bond funds can be the elixir for risk-averse investors who want to minimize the impact of volatility and still earn a return given the rising rate landscape.

"Short-term bonds are now allowing you to pick up yield that you're still generally not getting in any savings account, unless you hunt around for it," said Dan Egan, director of behavioral finance and investments with online investment company Betterment. "And that yield is likely to go up over the next two to four years as interest rates in the U.S. continue to rise."

Bonds with a shorter duration also reduce the exposure to inflation, which can tamp down the returns of fixed-income investments. In addition, bond giant Pimco found in an analysis that these short-term strategies have produced an annualized volatility of less than 1% over a 10-year period--compare this to stocks, which have produced a 15% annual volatility and 10% for long-term bond strategies.

"This has been a very long-running bull market, people have a lot of gains, and a lot of people are feeling like the music might stop sometime soon, and so they want to decrease the risk in their portfolio, and short-term bonds are a good way to do that," said Egan.

Here are three short-term bond ETF strategies than investors can utilize in their portfolios to help temper any volatility in the stock market.

1. iShares 1-3 Year Credit Bond ETF (CSJ)

CSJ tracks the investment results of the Bloomberg Barclays U.S. 1-3 Year Credit Bond Index where 90 percent of its assets will be allocated towards a mix of investment-grade corporate debt and sovereign, supranational, local authority, and non-U.S. agency bonds that are U.S. dollar-denominated and have a remaining maturity of greater than one year and less than or equal to three years–this shorter duration is beneficial given the time left for this extended bull market to run.

2. SPDR Portfolio Short Term Corp Bd ETF (SPSB)

SPSB seeks to provide investment results that correspond to the performance of the Bloomberg Barclays U.S. 1-3 Year Corporate Bond Index. SPSB invests at least 80 percent of its total assets in securities designed to measure the performance of the short-termed U.S. corporate bond market. Ideally, shorter-term bond issues with maturities of three to four years are ideal to minimize duration exposure should the bull market enter a correction phase.

3. Vanguard Short-Term Corporate Bond ETF (VCSH)

VCSH tracks the performance of the Bloomberg Barclays U.S. 1-5 Year Corporate Bond Index–a market-weighted corporate bond index with a short-term dollar-weighted average maturity. In addition to VCSH allocating capital towards debt issues that are investment-grade, fixed-income investors will like the reduced exposure to duration with maturities between 1 and 5 years.

 

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