Exploring a Bond Fund with Minimal Exposure to Rate Hikes

As its name implies, the Vanguard Short-Term Bond ETF (BSV) tracks shorter-term U.S. government, investment-grade corporate and investment-grade international dollar-denominated bonds.

Informed investors are probably aware that bond yields remain at or near historically low levels. Additionally, there is worry that subsequent rate hikes by the Federal Reserve could create an inverse yield curve detrimental to many investments at some point in the near future. Under these conditions, investing in short-term bond exchange-traded funds (ETFs) is preferable to being in ETFs focused on long-term bonds, as there is less potential that fallout from the Fed’s interest rate hikes will affect the securities. All of the bonds in BSV’s portfolio have maturities ranging anywhere from one to five years.

With over $50 billion of total assets under its belt and $118 million in daily trading volume, BSV is a substantial fund with a lot of liquidity. The fund is passively managed using index sampling and is also held by many large investment banks as a way to diversify portfolios and hedge against risk.

BSV has been receiving some mixed press lately. In late December, Nasdaq.com reported that the Relative Strength Index (RSI) reading for BSV had dropped below 30 to 27.5, indicating that the fund was potentially oversold. However, Nasdaq.com also noted on Jan.2 that a 0.9%, or $221.4 million, inflow into the fund had occurred after several weeks of a declining share price.

Over the last year, BSV has traded in a tight pattern of less than 2%. The fund hit its 52-week high of $80.25 on Sep. 7 and has since fallen back to trade around $79, as you can see below. However, the slide seems to have stabilized as the fund has traded in a tight spread of less than 20 cents since Christmas. BSV pays a small dividend of 1.76% and has a low expense ratio of just 0.07%, a hallmark of many Vanguard funds.

BSV’s top five holdings in the portfolio are the U.S. Treasury 1.375% Note, 1.87%; U.S. Treasury 1.25% Note, 1.68%; U.S. Treasury 1.5% Note, 1.66%; U.S. Treasury 2.0% Note, 1.65%;  and U.S. Treasury 1.125% Note, 1.32%. Other substantial sector holdings of BSV other than the U.S. Treasury include Industrials, 14.7%, and Financial Institutions, 10.9%.

If you are seeking to invest in the bond market with minimal exposure to the dangers of Fed rate hikes, then I encourage you to look into the Vanguard Short-Term Bond ETF (BSV) as a potential purchase.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.