2023-11-16 12:25:14 ET
Summary
- The Vanguard Ultra-Short Bond ETF Shares has been performing well in the current inflationary environment, but there may be better options further out on the duration side.
- The VUSB ETF is an actively-managed fund that focuses on short-term, investment-grade fixed-income securities offering potentially higher yields and returns.
- The fund has a well-diversified portfolio with investments in over 650 securities, reducing risk and ensuring stable dividends and overall performance.
Been a big two weeks. It seems that the Fed has "won" for now on the inflation front , and stocks as well as bonds have been surging in price. The last two years, the clear winner with hindsight was short-duration bonds. That may be about to change. So, while the Vanguard Ultra-Short Bond ETF Shares (VUSB) is a good fund for what it does, I think there's more potential further out on the duration side now.
VUSB is a relatively new entrant in the exchange-traded fund, or ETF, landscape, having been launched in April 2021. The fund primarily focuses on short-term, investment-grade fixed-income securities, aiming to deliver current income while minimizing price volatility. As an actively-managed fund, VUSB does not track a specified index. Instead, it utilizes the expertise of the fund managers to navigate the market and adjust the portfolio based on evolving market conditions. This active management approach can often lead to riskier investments but with potentially higher yields and returns.
The fund's portfolio is well-diversified, with investments in over 650 securities, including corporate bonds, agency and commercial Mortgage-Backed Securities ((MBS)), and treasury bills.
A Look at the ETF Holdings
Top Positions
VUSB significantly allocates its resources towards high-quality securities that boast robust credit ratings. These primarily comprise A-BBB rated securities, with a smaller but significant portion invested in AAA-AA rated securities. This focus on high-quality bonds reduces the credit risk associated with the fund, ensuring stable dividends, share prices, and overall performance.
vanguard.com
A substantial fraction of the fund's holdings are in short-duration bonds, averaging 0.9 years. This positioning towards short-term investments lessens the fund's vulnerability to interest rate risk, thereby making it more resilient to price oscillations resulting from changes in interest rates.
Sector Composition
VUSB's investments are spread across various sectors, with a significant portion in the finance sector. The fund also has considerable investments in asset-backed securities, foreign entities, and the industrial sector.
vanguard.com
This diversified sectoral allocation ensures that the fund is not overly exposed to any single industry, reducing the risk associated with fluctuations in specific sectors.
Peer Comparison
In juxtaposition with comparable ETFs, namely the JPMorgan Ultra-Short Income ETF ( JPST ) and the Janus Henderson AAA CLO ETF ( JAAA ), VUSB has similar path behavior but has underperformed.
JPST, for instance, focuses on shorter-term bonds, resulting in less interest rate risk. However, its yield is marginally lower than VUSB's. On the other hand, JAAA, despite investing in different types of securities, offers similar characteristics to VUSB. However, JAAA's prospective returns are higher, making it slightly more attractive from a historical perspective.
Pros and Cons
Pros
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Low Interest Rate Risk: Due to its focus on short-term bonds, VUSB has a low interest rate risk. This makes the fund less susceptible to price fluctuations due to changes in interest rates.
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Low Credit Risk: VUSB primarily invests in investment-grade securities, leading to a low credit risk. This ensures stable dividends and overall performance, regardless of the economic conditions.
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Diversified Portfolio: VUSB has a well-diversified portfolio, investing in over 650 securities across various sectors. This diversification reduces the fund's exposure to any single industry, reducing risk.
Cons
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Limited Capital Appreciation: While VUSB offers stable returns, it offers limited scope for capital appreciation due to its focus on short-term, low-risk securities.
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Lower total return compared to Peers: When compared to similar ETFs like JAAA, VUSB hasn't performed as well.
Conclusion: To Invest or Not to Invest
The Vanguard Ultra-Short Bond ETF is a well-diversified, low-risk ETF that focuses on delivering stable income to investors. However, if the Federal Reserve concludes its rate-hiking cycle soon, longer-duration high-quality bond ETFs might become a more appealing option due to higher rate sensitivity. This is a good fund, but just think from an asset allocation perspective there are better places to invest now.
For further details see:
VUSB: The Cycle For Short Duration Is Likely Over