Why supplement income with short-term bonds, “ BSV ”
Currently, the fixed income environment presents a dilemma, especially for retirees looking to supplement their income, but a compelling option is short-term bonds through assets like the ETF Vanguard Short-Term Bond Index Fund (BSV) shares.
Short-term bonds can help diversify a fixed income portfolio, while limiting duration risk. As inflationary pressures increase, the shorter term limits the damage if interest rates rise in the meantime.
“If you are well diversified, you will have to invest some of your money in fixed income instruments”, a Article on USA Today mentionned. “But which ones? According to Rotblut, the association’s asset allocation models use short-term bonds and medium-term bonds, both less sensitive to rate changes than long-term bonds. Also, he says, CDs, or certificates of deposit, and money market accounts can easily be replaced with an allocation of short-term bonds. “
BSV seeks to track the performance of the Bloomberg Barclays US 1-5 Year Government / Credit Float Adjusted Index. This index includes all medium and larger US government, investment grade and international high quality dollar denominated bond issues with maturities between 1 and 5 years that are publicly issued.
All of the fund’s investments will be selected through the sampling process, and at least 80% of its assets will be invested in bonds held in the index.
- Seeks to track the performance of the Bloomberg Barclays US 1–5 Year Government / Credit Float Adjusted Index, a market-weighted bond index that covers investment-grade bonds with an average dollar-weighted maturity of 1 to 5 years.
- Invests in US government, investment grade and international corporate bonds denominated in dollars.
- Follows a passively managed index sampling approach.
Keep it short to minimize credit risk
Retirees should be particularly wary of reckless maneuvering in today’s market environment. Nonetheless, short-term bond funds can provide another source of income while limiting the impact of rising rates.
“We don’t think investors should quickly adjust their portfolios to changes in bonds or stock markets,” Rotblut says. “Even with the recent increase, bond yields are still very low historically.”
“Interest rates and bond prices are inversely related, and bonds with longer maturities experience a larger price effect when interest rates change,” says Jay Abolofia, a certified financial planner at Lyon Financial Planning . “This means that if you think interest rates are going to rise in the near future, it may make sense to shorten the term of your bond holdings. In practice, this could mean replacing the longer-term bonds in your portfolio with shorter-term bonds of the same quality. “
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