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Weary Of Stretched Equity Valuations? 2 Bond ETFs Could Provide A Risk Breather

Published 08/26/2021, 04:46 AM
Updated 09/02/2020, 02:05 AM

In the early days of the global pandemic, bonds and US Treasuries offered safety for many investors. At the time, emergency rate cuts by the Federal Reserve put the spotlight on fixed income investment funds.

Since then, equities have come back in fashion. However, given the overstretched valuation levels in many stocks and the potential for higher inflation levels, many market participants have been debating whether equities could soon take a breather.

Bond prices are sensitive to interest rates. As they rise, bond prices usually fall. Bonds also contain issuer default risk, issuer credit risk, liquidity risk and inflation risk. The effect of these potential risks tend to be more pronounced in longer-term securities.

Investing in bond exchange-traded funds (ETFs) is a topic we've covered previously. Some of the funds we've discussed in the past are:

Aptus Defined Risk ETF (NYSE:DRSK): up 0.5% year-to-date (YTD) (covered here);

Fidelity® Total Bond ETF (NYSE:FBND): down 1.1% YTD (covered here);

iShares iBoxx $ High Yield Corporate Bond ETF (NYSE:HYG): up 0.4% (covered here);

iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSE:LQD): down 2.2%(covered here);

ProShares Investment Grade—Interest Rate Hedged (NYSE:IGHG): down 0.5% (covered here);

SPDR DoubleLine Total Return Tactical ETF (NYSE:TOTL): down 1.5% (covered here);

Vanguard Total International Bond Index Fund ETF Shares (NASDAQ:BNDX): down 1.0%(covered here).

Today, we introduce two more bond funds that could appeal to investors who plan to park some of their cash with the aim of collecting some yield.

1. Vanguard Short-Term Treasury Index Fund ETF Shares

Current Price: $61.45
52-Week Range: $61.37 - $62.14
Yield To Maturity: 0.20%
Expense Ratio: 0.05 % per year

The Vanguard Short-Term Treasury Index Fund ETF Shares (NASDAQ:VGSH) invests primarily in high-quality AAA-rated (i.e., investment-grade) US Treasury bonds with maturities ranging from one to three years. In other words, investors do not need to worry about default risk.

Vanguard Short-Term Treasury Index Fund ETF Weekly Chart.

VGSH, which currently has 92 holdings, tracks the performance of the Bloomberg Barclays US Treasury 1-3 Year Bond Index. Since its inception in November 2009, net assets have reached $17.1 billion.

VGSH has an average duration of two years. The short duration typically means very low volatility in price and little interest rate risk. As we have covered in previous articles, duration measures the sensitivity of bond prices to interest rate movements. In other words, the price would decline about 2% when interest rates rise one percentage point.

So far in the year, the fund is down 0.24%. Those investors who need to keep cash hedged against short-term volatility might want to research VSGH further.

2. SPDR Bloomberg Barclays International Treasury Bond ETF

Current Price: $29.48
52-Week Range: $29.02 - $31.47
Yield To Maturity: 0.78%
Expense Ratio: 0.35% per year

Our second fund takes us outside the US. The SPDR® Bloomberg Barclays International Treasury Bond ETF (NYSE:BWX) invests in sovereign debt of investment-grade countries other than the US. The fund started trading in October 2007. Its net assets are just over $1.0 billion.BWX Weekly

BWX, which currently has 1,037 holdings, tracks the returns of the Bloomberg Barclays Global Treasury ex-US Capped Index. Both the index and the fund are rebalanced on a monthly basis. Among the top holdings in the fund are government bonds from Japan (22.90%), the UK (5.45%), South Korea (4.67%), China (4.62%), Italy (4.61%), Canada (4.61%), Germany (4.61%), Australia (4.60%) and others.

Year to date, the fund is down 5.5%, and the current yield stands at 2.1%. Given the economic recovery we’ve seen in the past several months, most investors looking at overseas markets have preferred stocks over bonds. And market participants have been compensated for taking risk.

However, investors who believe global risk assets could come under pressure could put the fund on their radar. BWX is likely to be more volatile than a fund like VSGH.

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