Morningstar data shows that market conditions did not turn investors away from bonds in 2021 with Treasury Inflation-Protected Securities (TIPS) and short duration drawing attention.
“Even as inflation rose and bond yields turned negative, investors poured more money than ever into taxable bond funds,” Morningstar notes. Similarly, political risk and economic concerns did not deter investors from international equity funds. Both broad category groups saw more inflows than in any year since Morningstar began tracking flow of funds data in 1993.”
Intermediate bond funds garnered most of the inflows, but investors also quickly realized that inflation protection would be a necessity going forward. As the economy began to recover and the prospect of rate hikes seemed more likely, investor behavior reflected that notion.
“Intermediate core bonds still raked in the most money, but short-term and inflation-protected bond funds took a big chunk of investor dollars this year,” Morningstar adds. “Short-term bond funds were extremely popular at the beginning of the year. As inflation rose, investors increasingly invested in inflation-protected bond funds. The amount of money in these funds grew by 35%.”
Two options to consider
To gain short-term duration amid rate hikes while also limiting the impact of tighter monetary policy courtesy of the Federal Reserve, investors can look to the Vanguard Short-Term Inflation-Protected Securities Index Fund Stocks ETF (VTIP). The fund comes with a low expense ratio of just 0.05%.
VTIP seeks to track the performance of the Bloomberg US Treasury Index of Inflation-Protected Securities (TIPS) from 0 to 5 years. The index is a market capitalization-weighted index that includes all public inflation-protected obligations issued by the US Treasury with remaining maturities of less than five years.
The administrator attempts to replicate the target index by investing all, or substantially all, of its assets in the securities that make up the index, holding each security in approximately the same proportion as its weight in the index.
To further shorten duration to maturity dates not exceeding three years, there is the Vanguard Short Term Treasury ETF (VGSH). The fund also comes with a low expense ratio of 0.04%.
With a short-lived approach, VGSH is a prime option to consider. This ETF offers exposure to short-term government bonds, focusing on Treasury bonds maturing in one to three years.
It is an ideal option, given the uncertainty in the current market environment. Bonds can offer investors a safe haven from stock market volatility, while short-dated bonds limit the risks of potential rate hikes that can deprive investors of fixed income opportunities.
For more news, information and strategy, visit the Fixed Income Channel.
Source: news.google.com