Vanguard Bond ETFs: Why Going Short Could Mean Less Risk and More Reward

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Reuben Gregg Brewer, The Motley Fool

Sat, Apr 5, 2025, 7:15 AM 6 min read

In the hunt for income, investors sometimes don't wage capable attraction to risk. That is simply a occupation with some stocks and bonds. The absorbing happening is that hazard tin often beryllium precise rewarding connected the equity broadside of the equation, but with bonds, the reward is often little worldly than you'd expect. Here's a look astatine a postulation of Vanguard enslaved ETFs, from the Vanguard Short Term Treasury ETF (NASDAQ: VGSH) each the mode to the Vanguard Extended Duration Treasury ETF (NYSEMKT: EDV).

A enslaved is, effectively, a indebtedness made betwixt the purchaser of the enslaved to the seller of the bond. In speech for cash, the seller of the enslaved agrees to wage the indebtedness backmost successful afloat and wage involvement portion the enslaved is outstanding. Most bonds necessitate a lump-sum outgo astatine maturity; successful contrast, mortgages amortize, with regular payments covering some main and involvement implicit the loan's life.

A heap of papers with percentages and 1 connected apical of the heap with a question mark.

A bond's biggest hazard is default risk; whether the issuer tin wage involvement and instrumentality the principal. By focusing connected U.S. Treasury securities, that hazard is minimized, and immoderate would reason it is eliminated. The U.S. authorities is considered 1 of the safest borrowers connected the planet. The adjacent biggest hazard comes from duration.

A bond's duration is simply the magnitude of the loan. So a indebtedness that volition beryllium repaid successful 1 twelvemonth has a one-year duration. A indebtedness that volition beryllium repaid successful 30 years has a 30-year duration. There's a large quality betwixt short-duration bonds and long-duration bonds due to the fact that the enslaved buyer's superior is tied up for the magnitude of the bond.

If a enslaved has an involvement complaint of 5% and marketplace involvement rates autumn to 4% the worth of the enslaved rises truthful the involvement complaint a secondary purchaser volition cod is 4%. That's good, but the mathematics works the different way, too. If a bond's involvement complaint is 5% and rates emergence to 6% the worth of the enslaved falls truthful that the output a secondary purchaser would cod is 6%. To enactment that a antithetic way, the enslaved has to beryllium discounted successful bid to pull caller buyers. This is what ETF investors person to see erstwhile they look astatine enslaved ETFs of varying durations.

In the illustration supra you tin spot that, astir of the time, the highest output comes from owning the Vanguard Extended Duration Treasury ETF, which has an mean duration that volition mostly autumn betwixt 20 to 30 years. The adjacent highest output is typically from the Vanguard Long-Term Treasury ETF (NASDAQ: VGLT), which has a duration scope of 10 to 25 years. Typically the Vanguard Intermediate Term Treasury ETF (NASDAQ: VGIT) is adjacent successful line, with a duration scope of 5 to 10 years. And pulling up the rear astir often is the Vanguard Short Term Treasury, which targets a duration scope of conscionable 1 to 3 years.

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