Dethroning Cash and Adding Active Management With Vanguard

It might be auspicious timing that the VettaFi Q3 Fixed Income Symposium came less than 24 hours after the Federal Reserve instituted the first rate cut of the year. With that, investors must know how to navigate the current fixed income environment in which a Fed is easing monetary policy.

Vanguard was well-represented during the symposium. Their advisors addressed cash and use active fixed income products in a rate-cutting cycle. Vanguard fixed income product manager Brad Collins offered insight on how best to maximize cash as opposed to letting it sit idly by on the sidelines with TMX VettaFi investment strategist Cinthia Murphy.

Additionally, Vanguard head of active fixed income product management Samuel Martinez joined the final leg of the symposium. He spoke with TMX VettaFi head of sector and industry research Roxanna Islam on the benefits of an active strategy.

Dethroning Cash With Short Duration

The concept of “cash is king” is less palatable these days with the dollar heading lower. That will only be accelerated assuming the Fed starts to get more aggressive with rate cuts. It’s surprising that, as Collins mentioned, there’s “over $7 trillion sitting in bank accounts outside of managed assets today.”

Nonetheless, Collins is seeing a trend of cash moving into higher-yielding investment vehicles. However, there’s still too much cash sitting around or moving into lower-yielding money market accounts — a sign that investors are still nervous about the markets. Or, investors may still have thoughts of 2022 when the bond markets headed lower alongside equities. But, the decline in 2022 has fortified fixed income strategies today.

“The pain that we saw of the fixed income class in 2022 has really set up the fixed income asset class going forward,” Collins said. “It’s restored the power of fixed income in a portfolio.”

With yesterday’s rate cut and potentially more to come, Collins suggests investors rethink their cash allocation. One of the best ways is via ultra-short bond ETFs. These offer lower fees, tax efficiency, and on-demand liquidity due to their intraday trading capabilities.

“Historically, these products are going to offer higher returns than traditional cash vehicles (like) savings accounts, CDs (certificates of deposits), or even higher fee money market funds,” Collins said. He added that cash can serve as a functional and strategic allocation by matching needs with a bond duration profile using ETFs via a tiering strategy.

Collins mentioned a quartet of funds to consider for maximizing cash: the Vanguard 0-3 Month Treasury Bill ETF (VBIL), Vanguard Ultra-Short Treasury ETF (VGUS), Vanguard Short Duration Bond ETF (VSDB), and the Vanguard Short-Term Bond Index Fund ETF Shares (BSV).

VGUS, VBIL, and BSV offer indexed exposure to bonds with short duration, making them cost-effective solutions. On the other hand, VSDB also brings short-term bond exposure, but adds an active management component. This presented an opportunity for Vanguard to discuss the benefits of active management to wrap up the symposium.

Active Management Benefits

Active ETFs have taken center stage this year, surpassing the number of launches versus their passive peers. In the area of fixed income, active management becomes a necessity. This is especially true in a market environment where uncertainty continues to mount after a Fed rate cut.

Value is not represented by just a low expense ratio. Active management is a prime example of that, especially in a fixed income environment with its own set of nuances and complexities. Vanguard melds low expense ratios with active strategies. Martinez offered an interesting data point that supports the case for active management.

“Being able to bring expertise to how to allocate across those (various fixed income assets) can create a lot of value,” Martinez said. He added that Vanguard research shows that “active funds that are in the lower quartile in terms of the expense ratios tend to have similar upside capture ratios as more expensive products, but much better downside capture ratios. What that means is there’s a greater tendency to outperform in up markets, but also down markets.”

Vanguard Funds to Watch

That said, is active fixed income an all-weather solution? The question of when the time is ripe for active management came up. Martinez noted that in “all periods of time, for active, well-resourced, scaled managers should be able to find ways to add value.”

Martinez highlighted four funds, starting with the latest offering with the Vanguard High-Yield Active ETF (VGHY) for those looking to maximize yield. For an active fund that seeks income diversification, there’s the Vanguard Multi-Sector Income Bond ETF (VGMS).

For getting core exposure that adds all-encompassing diversification with the adeptness of Vanguard’s fixed income portfolio managers, Martinez cited the Vanguard Core-Plus Bond ETF (VPLS) and the Vanguard Core Bond ETF (VCRB). All funds come under the watchful eyes of Vanguard’s Fixed Income Group. This group has insurmountable experience and expertise in the bond markets.

“As active managers, we’re focused a lot on macro as well as the micro, and bringing that all together in a way that delivers consistent value over time across market cycles,” Martinez said.

If you missed the symposium, click here to watch the replay.

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

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