Fixed Income ETFs for Current Fed Rate Policy
Fixed Income ETFs for Current Fed Rate Policy
After two interest rate cuts in the second half of 2024, the Federal Reserve announced at the first Federal Open Market Committee meeting in 2025 that it would pause rate cuts and keep the benchmark rate at 4.25% to 4.5%.
At the last FOMC meeting, the Fed stated its intention to move the fed funds rate target down to neutral territory (where it neither stimulates nor restrains economic growth), but it said it is in no rush to do so.
Also, given the uncertainty in the economy – especially with President Donald Trump imposing and raising tariffs on certain countries – it is hard to predict what the Fed will do next and when.
The uncertainty arising from the new Trump presidency and the Fed interest rate outlook is making investors cautious, with many seeking safety and stability in their portfolios.
One example of this is that bond investors will prefer the safety (lower risk of default), liquidity (higher demand, especially by institutional investors) and lower volatility (less affected by interest rate fluctuations) of shorter-term fixed-income securities to the higher risk, lower liquidity and higher volatility of long-term notes or bonds.
Here are five fixed-income securities that investors seeking safety and stability amidst current economic uncertainty can consider:
Vanguard Short-Term Bond ETF (ticker: BSV)
iShares 1-5 Year Investment Grade Corporate Bond ETF (IGSB)
Schwab Short-Term US Treasury ETF (SCHO)
SPDR Bloomberg Short Term International Treasury Bond ETF (BWZ)
JPMorgan Limited Duration Bond ETF (JPLD)
At the last FOMC meeting, the Fed stated its intention to move the fed funds rate target down to neutral territory (where it neither stimulates nor restrains economic growth), but it said it is in no rush to do so.
Also, given the uncertainty in the economy – especially with President Donald Trump imposing and raising tariffs on certain countries – it is hard to predict what the Fed will do next and when.
The uncertainty arising from the new Trump presidency and the Fed interest rate outlook is making investors cautious, with many seeking safety and stability in their portfolios.
One example of this is that bond investors will prefer the safety (lower risk of default), liquidity (higher demand, especially by institutional investors) and lower volatility (less affected by interest rate fluctuations) of shorter-term fixed-income securities to the higher risk, lower liquidity and higher volatility of long-term notes or bonds.
Here are five fixed-income securities that investors seeking safety and stability amidst current economic uncertainty can consider:
Vanguard Short-Term Bond ETF (ticker: BSV)
iShares 1-5 Year Investment Grade Corporate Bond ETF (IGSB)
Schwab Short-Term US Treasury ETF (SCHO)
SPDR Bloomberg Short Term International Treasury Bond ETF (BWZ)
JPMorgan Limited Duration Bond ETF (JPLD)
Re: Fixed Income ETFs for Current Fed Rate Policy
Vanguard Short-Term Bond ETF (BSV)
BSV tracks the performance of Bloomberg U.S. 1-5 Year Government/Credit Float Adjusted Index, an index that covers investment-grade U.S. government, corporate and international dollar-denominated bonds with a dollar-weighted average maturity of one to five years.
The fund contains 2,773 bonds with an average effective maturity of 2.8 years and an average duration of 2.6 years. About 73% of the fund is in U.S. government securities, with the rest spread across corporate bonds with different credit ratings.
Below are some of the highlights of this exchange-traded fund, or ETF:
Expense ratio: 0.03%
30-day SEC yield: 4.4%
Inception: 04/03/2007
Assets under management (AUM): $33.1 billion
The competitive advantages of this fund are its low expense ratio, high liquidity and diversification (government, corporate and international dollar-denominated bonds).
BSV tracks the performance of Bloomberg U.S. 1-5 Year Government/Credit Float Adjusted Index, an index that covers investment-grade U.S. government, corporate and international dollar-denominated bonds with a dollar-weighted average maturity of one to five years.
The fund contains 2,773 bonds with an average effective maturity of 2.8 years and an average duration of 2.6 years. About 73% of the fund is in U.S. government securities, with the rest spread across corporate bonds with different credit ratings.
Below are some of the highlights of this exchange-traded fund, or ETF:
Expense ratio: 0.03%
30-day SEC yield: 4.4%
Inception: 04/03/2007
Assets under management (AUM): $33.1 billion
The competitive advantages of this fund are its low expense ratio, high liquidity and diversification (government, corporate and international dollar-denominated bonds).
Re: Fixed Income ETFs for Current Fed Rate Policy
iShares 1-5 Year Investment Grade Corporate Bond ETF (IGSB)
IGSB tracks the results of an index that covers U.S. dollar-denominated, investment-grade corporate bonds with a maturity of one to five years. Unlike BSV, this fund focuses only on corporate bonds.
The fund currently invests in 4,045 bonds with an average duration of 2.6 years. JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Morgan Stanley (MS) are the top three issuers in its portfolio. Also, the top three sectors the fund invests in are banking (32.4%), consumer non-cyclical (11%) and consumer cyclical (8.8%).
Below are some of the highlights of this ETF:
Expense ratio: 0.04%
30-day SEC yield: 4.8%
Inception: 01/05/2007
AUM: $21.6 billion
The competitive advantages of the fund are its high yield, high liquidity and sector-level diversification.
IGSB tracks the results of an index that covers U.S. dollar-denominated, investment-grade corporate bonds with a maturity of one to five years. Unlike BSV, this fund focuses only on corporate bonds.
The fund currently invests in 4,045 bonds with an average duration of 2.6 years. JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Morgan Stanley (MS) are the top three issuers in its portfolio. Also, the top three sectors the fund invests in are banking (32.4%), consumer non-cyclical (11%) and consumer cyclical (8.8%).
Below are some of the highlights of this ETF:
Expense ratio: 0.04%
30-day SEC yield: 4.8%
Inception: 01/05/2007
AUM: $21.6 billion
The competitive advantages of the fund are its high yield, high liquidity and sector-level diversification.
Re: Fixed Income ETFs for Current Fed Rate Policy
Schwab Short-Term US Treasury ETF (SCHO)
SCHO tracks the performance of an index that covers the short-term U.S. Treasury bond market, or U.S. Treasury securities that mature between one and three years.
The fund has 99 holdings with a weighted effective maturity of two years and an average duration of 1.9 years, with 99.8% of the fund's assets invested in U.S. Treasury securities.
Below are some of the highlights of this ETF:
Expense ratio: 0.03%
30-day SEC yield: 4.2%
Inception: 08/05/2010
AUM: $11.6 billion
Its competitive advantages are its low expense ratio, high liquidity and low risk (the vast majority of its holdings are U.S. Treasurys).
SCHO tracks the performance of an index that covers the short-term U.S. Treasury bond market, or U.S. Treasury securities that mature between one and three years.
The fund has 99 holdings with a weighted effective maturity of two years and an average duration of 1.9 years, with 99.8% of the fund's assets invested in U.S. Treasury securities.
Below are some of the highlights of this ETF:
Expense ratio: 0.03%
30-day SEC yield: 4.2%
Inception: 08/05/2010
AUM: $11.6 billion
Its competitive advantages are its low expense ratio, high liquidity and low risk (the vast majority of its holdings are U.S. Treasurys).
Re: Fixed Income ETFs for Current Fed Rate Policy
SPDR Bloomberg Short Term International Treasury Bond ETF (BWZ)
BWZ tracks the performance of the Bloomberg 1-3 Year Global Treasury ex-US Capped Index, an index that covers investment-grade, fixed-rate and local currency sovereign debt of countries outside the U.S. with remaining maturities of one to three years.
While IGSB focuses on U.S. corporate bonds and SCHO concentrates on U.S. Treasury securities, BWZ prioritizes foreign sovereign debt. It can be a good way for investors to diversify their portfolios and gain exposure to non-U.S. markets.
The fund has 281 holdings with an average maturity of 1.9 years. Japan (23%), France (5%) and Italy (5%) are the top three countries represented in the fund's holdings.
Below are some of the highlights of this ETF:
Expense ratio: 0.35%
30-day SEC yield: 2.2%
Inception: 01/15/2009
AUM: $133.6 million
Though its yield is lower and its expense ratio higher than the other ETFs on this list, they are both competitive with other short-term international Treasury bond ETFs.
Also, as stated above, this ETF is mainly for portfolio diversification (exposure to the international market).
BWZ tracks the performance of the Bloomberg 1-3 Year Global Treasury ex-US Capped Index, an index that covers investment-grade, fixed-rate and local currency sovereign debt of countries outside the U.S. with remaining maturities of one to three years.
While IGSB focuses on U.S. corporate bonds and SCHO concentrates on U.S. Treasury securities, BWZ prioritizes foreign sovereign debt. It can be a good way for investors to diversify their portfolios and gain exposure to non-U.S. markets.
The fund has 281 holdings with an average maturity of 1.9 years. Japan (23%), France (5%) and Italy (5%) are the top three countries represented in the fund's holdings.
Below are some of the highlights of this ETF:
Expense ratio: 0.35%
30-day SEC yield: 2.2%
Inception: 01/15/2009
AUM: $133.6 million
Though its yield is lower and its expense ratio higher than the other ETFs on this list, they are both competitive with other short-term international Treasury bond ETFs.
Also, as stated above, this ETF is mainly for portfolio diversification (exposure to the international market).
Re: Fixed Income ETFs for Current Fed Rate Policy
JPMorgan Limited Duration Bond ETF (JPLD)
JPLD invests in mortgage-backed or mortgage-related securities, asset-backed securities, money market instruments and structured investments.
The fund currently has 384 holdings with an average duration of 1.7 years and an average maturity of 3.3 years. Agency mortgage securities (33.4%), asset-backed securities (20%) and commercial mortgage-backed securities (17.5%) are the three top holdings in the portfolio.
JPLD takes a different approach from the other ETFs we have examined, focusing on securitized assets rather than traditional Treasury and corporate bonds. Though this may appear risky to some, it is worth noting that 81.9% of its assets are in AAA-rated securities.
Below are some of the highlights of this ETF:
Expense ratio: 0.24%
30-day SEC yield: 4.7%
Inception: 07/28/2023
AUM: $1 billion
The main competitive advantage of this fund is its high yield. Investors seeking diversification may also consider its spread across various securitized assets an advantage.
Furthermore, its three-year return as of Dec. 31, 2024 (3.2%) is higher than that of BSV (1.4%), IGSB (1.8%), SCHO (1.3%) and BWZ (-4.45%).
JPLD invests in mortgage-backed or mortgage-related securities, asset-backed securities, money market instruments and structured investments.
The fund currently has 384 holdings with an average duration of 1.7 years and an average maturity of 3.3 years. Agency mortgage securities (33.4%), asset-backed securities (20%) and commercial mortgage-backed securities (17.5%) are the three top holdings in the portfolio.
JPLD takes a different approach from the other ETFs we have examined, focusing on securitized assets rather than traditional Treasury and corporate bonds. Though this may appear risky to some, it is worth noting that 81.9% of its assets are in AAA-rated securities.
Below are some of the highlights of this ETF:
Expense ratio: 0.24%
30-day SEC yield: 4.7%
Inception: 07/28/2023
AUM: $1 billion
The main competitive advantage of this fund is its high yield. Investors seeking diversification may also consider its spread across various securitized assets an advantage.
Furthermore, its three-year return as of Dec. 31, 2024 (3.2%) is higher than that of BSV (1.4%), IGSB (1.8%), SCHO (1.3%) and BWZ (-4.45%).