Active Short-Term Funds Showcase Their Strong Performance

A Morningstar report compared the performance of a collection of short-term bond funds versus a core index. The result was the short-term bond collective outpacing the core index, making them an ideal alternative in the current times of sticky inflation.

In the past year, the short-term bond funds highlighted in the comparison returned an average of 5.10%.

“On an annualized rate, short-term bond funds have returned 4.77% over the last three years and 2.17% over the last five,” Morningstar noted, comparing that to the Morningstar US Core Bond Index, “which has returned 2.54% over the last 12 months, gained 2.69% per year over the last three years, and lost 0.73% per year over the last five years.”

The funds were selected based on performance over one-, three-, and five-year periods. A common characteristic all three share is their active management.

With the U.S. Federal Reserve divided on how to address interest rate policy, active management almost becomes an imperative feature when getting bond exposure. With that, Vanguard has a pair of active, short-term bond funds that should be under consideration.

Broad, Active Exposure

Fixed income investors who want to maximize yield opportunities, but remain primarily in investment-grade debt should consider the actively managed Vanguard Short Duration Bond ETF (VSDB). The fund includes all the benefits of short duration exposure, such as mitigating interest rate risk and thus, price volatility. Short-term bonds are generally less sensitive to rate changes versus their longer-term counterparts.

“Short-term credit has less exposure to volatility that can come from changes in interest rates compared with intermediate- and long-term bonds,” Vanguard explained in an Expert Perspectives piece

Additionally, VSDB offers a low expense ratio of just 0.15% or $15 for every $10,000 invested. That makes the fund competitive with even its passive fund peers that track an index.

An Active Muni Option

Municipal bonds have been offering investors a blend of both yield and credit quality this year. As opposed to VSDB, those who only want to tilt their active short-term exposure to munis can do so with the Vanguard Short Duration Tax-Exempt Bond ETF (VSDM).

Aside from the yield and less credit risk compared to corporate bonds, the obvious benefit of munis is their federal tax-free income. The fund comes with an even lower expense ratio compared to VSDB — 0.12% or $12 per every $10,000 invested.

The common denominator of both funds is that they both leverage the bond expertise of the Vanguard Fixed Income Group.

“That’s to take full advantage of the capabilities of Vanguard Fixed Income Group, Vanguard’s global active bond fund team, which has been running active funds for nearly 50 years,” Vanguard explained.

For more news, information, and analysis, visit the Fixed Income Content Hub.

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