As widely expected, the U.S. Federal Reserve cut the federal funds rate by 25 basis points for a second time this year. This gives fixed income investors an opportunity to reposition their portfolios with intermediate bonds or reconsider active exposure if they don’t have it already.
The Fed has been uncharacteristically telegraphic in its interest policy decisions as of late. This accurately led the markets to believe that a rate cut was forthcoming. In the most recent iteration of its post-rate decision statement, the Fed acknowledged moderate expansion of the economy while inflation remains elevated.
“Available indicators suggest that economic activity has been expanding at a moderate pace. Job gains have slowed this year, and the unemployment rate has edged up but remained low through August; more recent indicators are consistent with these developments,” the statement said. “Inflation has moved up since earlier in the year and remains somewhat elevated.”
Given this latest cut, will another happen before 2025 turns into 2026? Currently, the CME Group is forecasting an over 85% chance that may occur and potentially more to come in the new year.
Interest rate decisions can always induce a level of angst for the bond markets. For advisors and individual investors, positioning fixed income portfolios appropriately in the current rate environment is paramount. As such, consider options from Vanguard as an ideal path for bond ETF exposure as the rate-cutting cycle resumes.
Four Intermediate Rate Cut Options
As the Fed begins to ease monetary policy, investors can step further out on the yield curve with intermediate exposure. Vanguard has four options that can cater to various investor profiles and their associated fixed income goals.
- Vanguard Intermediate-Term Bond ETF (BIV): tracks the Bloomberg U.S. 5–10 Year Government/Credit Float Adjusted Index, which covers investment-grade bonds with a dollar-weighted average maturity of five to 10 years.
- Vanguard Intermediate-Term Treasury ETF (VGIT): invests Treasury notes that fall within that five- to 10-year maturity-date window.
- Vanguard Intermediate-Term Corporate Bond ETF (VCIT): seeks to track the performance of a market-weighted corporate bond index with an intermediate-term dollar-weighted average maturity. VCIT focuses on high-quality corporate bonds with maturity dates that fall between five to 10 years.
- Vanguard Intermediate-Term Tax-Exempt Bond ETF (VTEI): ideal for investors seeking the added tax benefits of municipal debt with their federal tax-free income. VTEI targets munis with maturities between one month and 20 years.
BIV, VGIT, and VCIT feature a low expense ratio of 5 basis points or $5 per every $10,000 invested. VTEI carries an expense ratio of 8 basis points or $8 per every $10,000 invested.
Active Options
Rather than constantly worry about what the Fed will do with interest rates, let an active manager handle all of that. Vanguard’s fixed income roster includes nine actively managed funds that can suit investors’ portfolios. All funds leverage the experience and expertise of the Vanguard Fixed Income Group who can adjust the holdings of the fund whether the Fed is cutting, raising, or keeping rates steady.
For those looking to maximize income options as rates fall, consider funds like the Vanguard Core-Plus Bond ETF (VPLS). Those seeking additional income and don’t mind the added credit risk can opt for the newest addition to the active fixed income roster: the Vanguard High-Yield Active ETF (VGHY).
Best of all, the active funds come with low expense ratios that are competitive relative to the broader fixed income ETF market.
Click here to learn more about Vanguard’s active fixed income ETF offerings.
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