Chapter 14
Your Basic Bonds: Treasuries, Agency Bonds, and Corporates
IN THIS CHAPTER
Exploring the bond offerings of Uncle Sam
Learning how to beat inflation
Entering the world of agency bonds
Understanding bond ratings and what they mean
At the time of this writing, there are about 250 bond ETFs. (This number does not include leveraged and inverse bond ETFs, which in Chapter 18, I both describe and attempt [not too subtly] to steer you away from.) The bond ETFs worth considering are issued largely by iShares, State Street SPDRs, Vanguard, JPMorgan, Schwab, Fidelity, Invesco, and BNY Mellon Bank.
In this chapter, I present some of my favorites, among the Treasury, U.S. agency, and corporate-bond offerings. In Chapter 15, I introduce you to some faves in the municipal and foreign-bond categories.
Please note that with the discussion of each bond ETF in this and the next chapter, I include the current yield: how much each share is paying as a percentage of your investment on the day I’m writing this chapter. I do so only to give you a flavor of how the yields differ among the funds. Current yields on a bond or bond fund, especially a long-term bond or bond fund, can change dramatically from week to week. So, too, can the difference in yields between short- and long-term bonds (known as the yield curve). You can check the current yield of any bond fund, as well as the yield curve, on the sites of the ETF providers themselves (see Appendix A) or on general investing sites such as Bloomberg.com (click Rates & Bonds), Treasury.gov, or (for the best compilation of aggregate yields on all kinds of bonds) Fidelity.com. With Fidelity, you don’t need to have an account; just click Investment Products, then Bonds, and then Research Fixed Income.
Note that several different kinds of bond yield exist. (For detailed information, I once again refer you to my book, Bond Investing For Dummies.) For the sake of consistency, the bond yield I refer to throughout the rest of this chapter is the “SEC 30-Day Yield.” Here’s the formula for you techno-heads: 2[{(a–b)/cd+1}^6–1]!
For you non-techno-heads, here’s what this yield essentially means: If you (or the fund manager) were to hold to maturity each and every one of the bonds in a fund’s portfolio, as it stood over the past 30 days, and reinvest all interest payments (that is, you plowed those interest payments right back into your bond portfolio), your SEC yield is what you’d get over the course of a year. It takes into account all fund fees and expenses. The formula was created, and the methodology is enforced, by the U.S. Securities and Exchange Commission, which is where the “SEC” in the formula’s name comes from.
Tapping the Treasuries: Uncle Sam’s IOUs
If the creator/issuer of a bond is a national government, the issue is called a sovereign bond. The vast majority of sovereign bonds sold in the United States are Uncle Sam’s own Treasuries. (By the way, “Treasuries” are sometimes spelled “Treasurys.” I don’t know why.) Treasury bonds’ claim to fame is the allegedly absolute assuredness that you’ll get your principal back if you hold a bond to maturity. The United States government guarantees it. For that reason, Treasuries are sometimes called “risk-free.”
Treasury bond ETFs come in short-term, intermediate-term, and long-term varieties, depending on the average maturity date of the bonds in the ETF’s portfolio. In general, the longer the term, the higher the interest rate but the greater the volatility. Note that interest paid on Treasuries — including Treasury ETFs — is federally taxable but not taxed by the states. As it happens, bonds issued by state and local governments in the United States, known as municipal bonds, are not taxed by the federal government. This reciprocal deal was orchestrated by the Supremes (those judges in Washington, not the singing group) back in 1895.
Treasuries, regardless of whether they are short- or long-term, also come in two broad groupings: conventional and inflation-adjusted. I introduce conventional Treasuries first, and then inflation-adjusted Treasuries. Conventional bonds pay a higher interest rate than inflation-adjusted bonds. But inflation-adjusted bonds get to see their principal bumped up twice a year to match the Consumer Price Index (CPI).
Following are detailed descriptions of some of your best choices for conventional Treasury ETFs. Note that if you don’t see the word inflation or TIPS (Treasury Inflation-Protected Securities) in the name of the fund, you can assume that the fund is holding conventional Treasuries.
Schwab Short-Term U.S. Treasury ETF (SCHO)
Indexed to: The Bloomberg Barclays U.S. Treasury 1–3 Year Bond Index
Expense ratio: 0.05 percent
Current yield: 0.18 percent
Average weighted duration: 2.0 years
Russell’s review: This ETF and others of its ilk (such as the Vanguard Short-Term Government Bond ETF [VGSH]) should be considered “near-cash.” You’ll see very little volatility, and you’ll see very little interest. I would consider this a good place to park any money you need to keep liquid, but you should compare the yield on SCHO to what you can get with an online, FDIC-insured savings bank, such as Ally Bank or Marcus, or short-term CDs. As I’m writing these words, Marcus Bank is offering 0.50 percent on an FDIC-insured savings account. That beats SCHO, and I would suggest you opt for the savings account, unless you plan on using the money in the next few weeks, in which case taking it from your brokerage account would be easier than opening an online savings account. A good way to shop savings account interest rates, by the way, is to go to the website, Bankrate.com.
Vanguard Short-Term Treasury ETF (VGSH)
Indexed to: The Bloomberg Barclays U.S. Treasury 1–3 Year Bond Index
Expense ratio: 0.05 percent
Current yield: 0.21 percent
Average duration: 2.0 years
Russell’s review: This fund is nearly identical to SCHO (the preceding fund). They track the same index, and they have the same low volatility, little interest, and low expense ratio. And in this category, with yields so low, the expense ratio must be low or you’re going to lose money in real-dollar terms. I’m offering you two good options for tapping short-term Treasuries, in part not to show favoritism, but also to make a point about expense ratios. Expense ratios for ETFs have dropped precipitously over the past several years. At the same time, trading commissions charged by brokerage houses have also dropped precipitously, and in the last year or two, there’s been a revolution of sorts, with most large brokerages now charging zero to place all ETF trades. The two trends are closely related. When one can easily and cheaply swap from one ETF to another (say, Vanguard’s VGSH to Schwab’s SCHO, or the other way around), it makes for much greater competitiveness among the fund companies. So keep an eye on the expense ratios of VGSH and SCHO. My guess is that one or the other brokerage will soon reduce the expense ratio from the current low, low 0.05 percent to something even lower. Caution: Even when there are no trading commissions, you may still lose a few pennies on every trade due to “spreads” — the difference between asking price and selling price (a.k.a., the cut of the middlemen), so you don’t want to trade ETFs every day, even with no commissions. In a non-retirement account, buying and selling may also be a taxable event.
Vanguard Intermediate-Term Treasury Index ETF (VGIT)/Schwab Intermediate-Term U.S. Treasury (SCHR)
Indexed to: The Bloomberg Barclays U.S. Treasury 3–10 Year Index, an index tracking the intermediate-term sector of the U.S. Treasury market
Expense ratio: 0.05 percent
Current yield: 0.9 percent
Average duration: 5.4 years
Russell’s review: Expect modest returns and modest volatility. Of the three kinds of Treasuries — short, intermediate, and long — the intermediate-term bonds make the most sense for most people’s portfolios, and the virtually identical VGIT and SCHR ETFs are excellent ways to invest in them. Whatever your total allocation to fixed income, Treasuries deserve a certain allotment of that fixed income. You can see how I work these ETFs into several model portfolios in Chapter 21.
Schwab Long-Term U.S. Treasury ETF (SCHQ)/Vanguard Long-Term Treasury ETF (VGLT)
Indexed to: The Barclays Capital U.S. Long Treasury Index, an index tracking the long-term sector of the U.S. Treasury market
Expense ratio: 0.05 percent
Current yield: 2.25 percent
Average duration: 17.7 years
Russell’s review: These two funds are, for all intents and purposes, identical. They are both very low cost, and they provide access to the very same bonds. But do you want long-term bonds in your portfolio? Given the potentially high volatility of long-term bonds, especially the degree to which prices could tumble if interest rates rise too quickly, I think your allocation to long-term bonds should be limited. And long-term Treasuries? Hmmm. I believe that Treasuries are perhaps the safest investment in the land, but not entirely risk-free. I don’t mean to sound unpatriotic. I don’t mean to sound alarmist. But the size of our nation’s debt and deficit makes the Appalachians look flat by comparison. I may consider a short-term Treasury bill to be risk-free, but a 20+ year Treasury? Wave your flag all you like, but you take on some risk of principal loss here. I’m not alone in my thinking. In 2011, Standard & Poors downgraded its credit ratings of U.S. Treasuries from AAA (outstanding) to AA+ (excellent). The other two big credit rating firms, Moody’s and Fitch, did not follow S&P in downgrading Uncle Sam’s creditworthiness, but in July 2021, Fitch announced that it is considering a downgrade, not only because of high government debt, but also because of “a decline in the coherence and credibility of U.S. policymaking,” which I think is an indirect way of saying that lawmakers of the two major parties can’t sit at the same table without vomiting, so little gets done.
Understand the risk here: The U.S. government doesn’t need to go “bankrupt” before Treasury bonds take a hit. Interest rates are set by the marketplace and, in part, reflect creditworthiness. The more indebted our nation becomes, the more worries that arise about a “decline in the coherence of policymaking,” the more closely it begins to resemble a potential deadbeat. Deadbeats pay higher interest rates than others. If the market starts to demand deadbeat rates of interest on U.S. sovereign debt, interest rates will shoot up and the value of long-term Treasuries will tumble. Long-term Treasuries may deserve a modest allocation in your portfolio, and VGLT or SCHQ represent a fine way to get it. Either way, make sure that any money allocated to this fund is money that you aren’t going to need to touch for a number of years.
Bread at $15 a Loaf? Getting Inflation Protection in a Flash
Technically, U.S. Treasury Inflation-Protected Securities are Treasuries, but few investment pros ever refer to them as Treasuries. Most refer to them simply as TIPS. I discuss them separately from the other Treasury obligations here because they play a distinctly different role in your portfolio.
The gig with TIPS is this: They pay you only a nominal amount of interest (currently even long-term TIPS are paying about one-third of 1 percent), but they also kick in an adjustment for inflation. So, for example, if inflation is running at 3 percent, all things being equal, your long-term TIPS will return 3 percent, plus whatever nominal interest is on top of that.
If you want to know what the rate of inflation is going to be over the next few years, I can’t tell you, but I can tell you what rate of inflation the bond market expects. That would be the difference between conventional Treasury bonds and TIPS. If, for example, a 10-year conventional Treasury bond were paying 3 percent and the 10-year TIPS were paying 0.5 percent, the difference (2.5 percent) would be the rate of inflation that bond buyers collectively expect to see.
Either the Schwab U.S. TIPS ETF (SCHP) or the similar but shorter-term Vanguard Short-Term Inflation-Protected Index Fund (VTIP) are excellent ways to tap into this almost essential ingredient in a well-balanced bond portfolio.
Schwab U.S. TIPS ETF (SCHP)
Indexed to: The Bloomberg Barclays Capital U.S. Treasury Inflation-Linked Bond Index
Expense ratio: 0.05 percent
Current yield: Puny, but you get an inflation adjustment on top of the puny interest. The best way to estimate the return you’re going to get on TIPS is to assume that it will be very similar to conventional Treasuries of similar maturity and duration. If inflation runs higher than expected, you’ll do better with TIPS; if slower than expected, you’ll do better with conventional Treasuries. Best, therefore, to have both.
Average duration: 7.4 years
Russell’s review: TIPS belong in your portfolio, and this fund may be the best way to hold them. You won’t get rich off the earnings, and the volatility may be more than you like. But if inflation goes on a tear, you are protected. Not so with other bonds. Of course, if inflation doesn’t go on a tear, your money will earn sub-par returns. But that’s okay — you can think of any lost interest as the premium on an insurance policy that you know you should have.
Note that TIPS are notoriously tax inefficient, even when held in an ETF. Ideally, you would hold your TIPS shares in a tax-advantaged retirement account. In general, whatever your overall allocation is to fixed income (excluding short-term cash needs), perhaps one-quarter to one-third of that amount could be put into a fund such as SCHP or VTIP. Err more toward one-quarter if you have a fairly aggressive portfolio. Err more toward one-third if you have a more conservative portfolio. Rationale: Your stocks are also, historically speaking at least, a good hedge against inflation. The more stocks you own, the less important the role of TIPS.
Vanguard Short-Term Inflation-Protected Securities Index Fund (VTIP)
Indexed to: The Bloomberg Barclays U.S. Treasury Inflation-Protected Securities 0–5 Year Index
Expense ratio: 0.05 percent
Current yield: Puny — even punier than you’d get on the longer-term TIPS, but you get an inflation adjustment on top of the punier-than-puny interest. You’re never ever going to retire rich off this fund.
Average duration: 2.6 years
Russell’s review: Given that you can expect to earn next to nothing on top of the inflation rate, this fund belongs in your portfolio merely as a stabilizer, or as a form of “near-cash.” If you told me that you wanted to make sure you had $50,000 in a year with which to buy a house, I might have you put that $50,000 into this fund…or perhaps $25,000 into this fund and $25,000 into short-term conventional Treasuries. As with any fund that pays little, keeping your costs low is crucial. And this Vanguard fund charges less than any competitor for short-term TIPS.
Treasuries’ Cousins: U.S. Agency Bonds (Mortgage-Backed Securities)
The better part of mortgage-backed bonds are issued by the likes of the Government National Mortgage Association (Ginnie Mae or GNMA) and the Federal National Mortgage Association (Fannie Mae or FNMA), collectively known as government agencies. Even though not all of Washington’s agencies are technically part of the government, most of them — and the bonds they issue — have not only mortgages to buoy them but also the full faith and backing of the U.S. government.
And so these bonds, and the ETFs that offer these bonds, are generally considered very safe — almost as safe as Treasuries. Because of the nature of the bonds, they are not as interest-rate sensitive as Treasuries. And because they are both considered a tad less safe and also not as liquid (not a concern for buy-and-hold investors), they tend to pay slightly more over time than Treasuries. As I’m writing these words, the yield on agency bonds is about 1 percent, versus 0.9 percent for intermediate-term Treasuries. They are often that close.
So, why bother with agency bonds? Well, they also serve as a good diversifier within a bond portfolio. They sometimes see their prices rise or remain stable when other bond prices are falling, and vice versa. I do not consider them a necessity, although I certainly have used them with clients who have conservative portfolios, and therefore a lot of bonds. Lately, with the threat of rising interest rates being higher than usual, I’ve upped the allocation of agency bonds in many client portfolios, as well as in my own, because they do tend to be less interest-rate sensitive than Treasuries.
If you want agency bonds in your portfolio, I recommend without reservation the Vanguard Mortgage-Backed Securities ETF (VMBS):
Indexed to: The Bloomberg Barclays Capital U.S. MBS Float Adjusted Index
Expense ratio: 0.05 percent
Current yield: 1.03 percent
Average duration: 4.9 years
Russell’s review: You can find a dozen ETFs just like this one issued by other providers. But given the great similarity between all of these funds, I say go with the least expensive, and that, at least for now, is the Vanguard fund. Float adjusted, by the way, simply means that the index only counts shares available to investors and excludes closely held shares that don’t trade on the open market. In terms of the risk and return of an ETF, I’d say it is of minimal importance.
Banking on Business: Corporate-Bond ETFs
Logically enough, corporations issue bonds called corporate bonds, and you can buy a dizzying array of them with varying maturities, yields, and ratings, either individually or in fund form. There are many dozens of corporate-bond ETFs. And with corporate bonds — even more than government bonds because diversifying to curtail risk is crucial — it makes a whole lot of sense to buy them in fund form. With fees lately dropping like hail, ETFs provide a very potent way to access this important asset class.
Corporate bonds typically pay higher rates than government bonds. Historically, going way back, the “spread” has been about 1 percent a year higher, but in the last decade or two, the return on corporate bonds overall has been much higher than on government bonds — more than 2 percent higher, although the spread has diminished recently. Vanguard’s Intermediate-Term Corporate Bond ETF (VCIT) was established on November 19, 2009, the very same day that Vanguard gave birth to its Intermediate-Term Treasury ETF (VGIT). The average annual returns to date (mid-2021) are 3.10 percent for VGIT versus 5.71 percent for VCIT; the current yield is 0.92 percent for VGIT versus 1.92 percent VCIT.
In the area of corporate bonds, credit ratings are very important. Know that the average bond rating of, say, Vanguard’s VCIT, is between Baa and A, which means, more or less, that the bonds are issued by companies that are fairly solvent. But you are “earning” the higher return over VGIT by taking a risk that, in the case of a recession, some of the issuers might go belly up, and your ETF shares could see a price drop. See the sidebar, “Understanding bond ratings,” for more information.
Do the bond raters sometimes get it wrong? Do they sometimes mistake a solid company for a losing venture and vice versa? Sometimes, they do. But that certainly doesn’t render them useless. They do have a pretty good track record overall, just as Consumer Reports does for helping you choose reliable cars over lemons.
Oh…if you don’t know how the ratings agencies rank a certain bond or bond fund, just look at the bond’s or fund’s yield: generally, the higher the yield, the lower the credit quality. The highest-yielding bonds are called, appropriately enough, high-yield bonds, which is more or less synonymous with junk bonds. I generally avoid junk bonds for the simple reason that they, unlike “investment-grade” bonds, do not offer a safe harbor should your stocks tumble. When stocks go south, junk bonds almost always do, as well (although the stocks may go as far south as Costa Rica, while the junk bonds may descend only to Mexico). So what’s the point? You might as well invest in stocks, where the long-term returns are going to be higher than with any bonds, including the highest-yielding bonds.
Vanguard Intermediate-Term Corporate Bond ETF (VCIT)
Indexed to: The Bloomberg Barclays U.S. 5–10 Year Corporate Bond Index
Expense ratio: 0.05 percent
Current yield: 1.9 percent
Average credit quality: Somewhere between A and Baa, on the Moody’s scale
Average duration: 6.5 years
Russell’s review: Investment-grade corporate bonds have done a pretty good job of holding their own in bad times. You get more return than you do with Treasuries of equal maturity, although unlike Treasuries, with corporate bonds you pay state taxes on the dividends. If your portfolio is large enough, you want something like VCIT, as well as government bonds. In fact, with interest on government bonds now riding lower than the expected rate of inflation, you’ll need some corporate bonds just to keep your bond portfolio above water. (Reminder: Bonds are for ballast and getting a good night’s sleep, not for high return. That’s what stocks are for. Breaking even on your bonds after inflation should not be considered any great failure.)
Vanguard ESG U.S. Corporate Bond ETF (VCEB)
Indexed to: The Bloomberg Barclays MSCI U.S. Corporate SRI Select Index (SRI stands for Socially Responsible Index; ESG stands for Environment, Social, and Governance.)
Expense ratio: 0.12 percent
Current yield: 1.78 percent
Average credit quality: Somewhere between A and Baa, on the Moody’s scale
Average duration: 8.1 years
Russell’s review: If you’d rather not invest in companies that profit off porn, booze, gambling, nukes, automatic rifles, and fossil fuels, then you might want to spend a little more for VCEB, which, other than screening out certain companies, is a heck of a lot like VCIT. I would expect the long-term returns of VCEB (which has only been in existence since late 2020) to be a smidgeon less than VCIT, but perhaps with slightly less risk. See more on ESG investing in Chapter 17.
Vanguard Short-Term Corporate Bond Index (VCSH)
Indexed to: The Bloomberg Barclays U.S. 1–5 Year Corporate Bond Index, a pot of about 2,340 bonds from corporations that the raters think have little chance of going belly up
Expense ratio: 0.05 percent
Current yield: 0.84 percent
Average credit quality: Between A and BBB, on the S&P scale
Average duration: 2.8 years
Russell’s review: In normal times, I would encourage most investors to stick with intermediate-term bonds and forget about short-term bonds that typically yield considerably less. However, when interest rates are as low as they have been in decades (as they are while I’m writing this chapter), I tend to lean my client portfolios more to the short term. Reason: When interest rates rise, as they eventually will, longer-term bonds are going to get hit. For more conservative investors especially, VCSH, during times of very low interest rates, may warrant half your allocation to corporate bonds. When interest rates start to climb back up to more normal historical levels, you may want to move some or all of the money in VCSH to VCIT or VCEB.
iShares ESG Aware 1–5 Year USD Corporate Bond ETF (SUSB)
Indexed to: The Bloomberg Barclays MSCI US Corporate 1–5 Year ESG Focus Index
Expense ratio: 0.12 percent
Current yield: 0.73 percent
Average credit quality: Between A and BBB, on the S&P scale
Average duration: 2.82 years
Russell’s review: If you’ll sleep better at night knowing that you’re not supporting the manufacture of weaponry, tobacco, coal, and other goods that collectively are of dubious value to humans and polar bears, and you also want the lesser volatility but can accept the lower returns of short-term bonds, then this fund is a good choice for you.
The Whole Shebang: Investing in the entire U.S. Bond Market
The broadest fixed-income ETFs are all-around good bets, especially for more modest-sized portfolios. Note that these bonds use a total bond market approach, which means about two-thirds government bonds and one-third corporate. These funds also make the most sense for investors with lots of room in their tax-advantaged retirement accounts. If you have to stick your bonds in a taxable account, you’re probably better off separating your Treasury bonds and your corporate bonds. Reason: You get a small tax break on Treasury bond interest, in that you do not have to pay state income tax. If, however, your Treasury bonds are buried in an aggregate fund, such as these, you have to pay state income tax on the interest. Dem’s da rules.
Note that the terms aggregate bond, total bond, and core bond can be a bit misleading in that they represent bonds issued by the federal government (Treasury and agencies) and by corporations, but as a rule, they do not include tax-free municipal bonds, which make up a good chunk of the true total bond market but are considered an entirely separate genus from taxable bonds. They also do not include Treasury Inflation-Protected Securities, also known as TIPS. That, too, is considered a different beast, kept aside from other “conventional” bonds.
BNY Mellon Core Bond ETF (BKAG)
Indexed to: The Bloomberg Barclays US Aggregate Total Return Index
Expense ratio: 0 percent (No, this is not a typo.)
Current yield: 1.1 percent
Average credit quality: 38 percent of the bonds are Treasuries, 27 percent are agency bonds, and the rest are mostly A to Baa corporate bonds, using Moody’s ratings.
Average duration: 6.54 years
Russell’s review: In April of 2020, BNY Mellon Bank, one of the largest banks in the world, finally jumped into the ETF game with eight very reasonably priced, broad index funds. Two of them — BKAG, and the BNY Mellon US Large Cap Core Equity ETF (BKLC) — charge no fees. A few mutual-fund companies, such as Fidelity, have offered a handful of broad, indexed no-charge mutual funds for several years now. That’s understandable. Fidelity hopes to bring in clients to use its brokerage services by luring them with these freebies. But in the case of ETFs, well, I was shocked to see this. Because you can buy ETFs at any brokerage, BNY Mellon stands to gain little. I asked a BNY Mellon executive why they were doing this, and he said it was to introduce investors to the bank’s lineup of ETFs, hoping that they will buy others. In a sense, this is just like a “loss leader,” such as cheap eggs or milk, used to bring customers into a grocery store. I say take advantage! If you are going to own a “total bond” fund, why not get it for free? I really like this ETF. But know that there are other very similar total bond funds that charge almost nothing.
Vanguard Total Bond Market (BND)
Indexed to: The Bloomberg Barclays U.S. Aggregate Float Adjusted Index, which is made up of about 10,000 bonds, two-thirds of which are U.S. government bonds and one-third of which are higher-quality corporate bonds. The average credit quality indicates that there is little chance any of the bonds in the index will default, and even if a few did, with about 10,000 holdings, the entire apple cart wouldn’t turn over.
Expense ratio: 0.035 percent
Current yield: 1.34 percent
Average credit quality: 65 percent are U.S. government bonds, and the majority of the rest are corporate bonds rated BBB or higher.
Average duration: 6.8 years
Russell’s review: How can you go wrong with the world’s largest provider of index funds tracking the entire bond market for you and charging you only 0.035 percent (that’s 3.5 percent of 1 percent)? At present, this is the most economical total bond ETF, with the exception of BNY Mellon Bank’s free ETF. BND makes an excellent building block in smaller portfolios or for any investor seeking the ultimate in simplicity, especially where there’s lots of room in tax-advantaged accounts. For larger portfolios, however, where you can afford to mix and match other bond funds of different flavors, the need for BND becomes less clear. This fund is very similar to the BNY Mellon Bank ETF (BKAG), with a slightly longer duration (meaning a tad more interest-rate risk), a pinch fewer government and agency bonds, more corporate bonds, and a wee bit higher yield as a result.
Vanguard Short-Term Bond (BSV)
Indexed to: The Bloomberg Barclays U.S. 1–5 Year Government/Credit Float Adjusted Index, which is about 2,600 bonds, two-thirds of which are short-term U.S. government and one-third of which are higher-quality corporate bonds, also of short-term maturity
Expense ratio: 0.05 percent
Current yield: 0.51 percent
Average credit quality: 67 percent U.S. government, with the rest being corporate bonds with ratings of BBB or higher.
Average duration: 2.8 years
Russell’s review: In normal times, I encourage most investors to stick with intermediate-term bonds and forget about short-term bonds that typically yield considerably less. Recently, however, with interest rates so low, low, low, I’ve been leaning my client portfolios more to the short term. Reason: When interest rates rise, as they eventually will, longer-term bonds are going to suffer. For more conservative investors especially, BSV may warrant half of your allocation to U.S. bonds. When interest rates start to climb back up to historical norms, you may then want to move some or all of your BSV assets to BKAG or BND. Because this fund is relatively nonvolatile, I sometimes recommend it as “near-cash,” for someone who wants their principal kept safe and doesn’t require much in return.