Fixed-rate bonds versus floating-rate notes in a falling rate environment

Floating-rate investments are popular because, as rates rise, they can offer higher yields than traditional short-term investments. However, they have the opposite effect as rates fall. Fixed-rate bond investments—like Vanguard Core (VCRB) and Core-Plus (VPLS) Bond ETFs—on the other hand, maintain their coupon income and may benefit from price appreciation in a declining rate environment.

In today’s environment, as the Federal Reserve cuts rates, there’s a greater risk that floating-rate bond coupons will reset downward. Additionally, with credit spreads at near historic lows, corporate floating-rate bonds are at risk of spreads potentially widening. This creates the need to reassess clients’ floating-rate allocations to ensure that their fixed income portfolios remain aligned with their goals.

The charts below illustrates how, during rate-cutting cycles like the global financial and COVID-19 crises, the Bloomberg U.S. Floating Rate Notes Index fell flat compared to the Bloomberg fixed rate indexes.

Vanguard Core and Core-Plus Bond ETFs

A high allocation to floating-rate bonds or ETFs may not align with client goals in today’s rate environment. If your clients’ portfolios include floating-rate investments, returning to a strategic allocation that includes high quality fixed-rate ETFs could be the right move.

Vanguard’s actively managed Core and Core-Plus Bond ETFs give you access to low-cost, institutional quality¹ investments for your clients. They feature intermediate durations and could each be used as the foundation of a fixed income portfolio.

Actively managed by a deep bench of experts

Vanguard Fixed Income Group is among the world’s largest bond fund managers, overseeing more than $473 billion in actively managed fixed income funds.

Vanguard’s team of about 140 investment professionals has been managing active fixed income for over 45 years.² Our size and reputation provide us with extensive relationships in the markets that can help with trading and access to new issues.

If your clients are invested in floating rate ETFs, consider reallocating to Vanguard Core and Core-Plus Bond ETFs to get an actively managed, low-cost, fixed-rate anchor for their fixed income portfolios.

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Vanguard Core Bond ETF (VCRB)

Vanguard Core Plus Bond ETF (VPLS)

1 "Institutional quality" in this context is meant to convey a level of professional rigor and expertise combined with low costs.

2 Vanguard, as of December 31, 2024.

Notes

For more information about Vanguard funds and Vanguard ETFs, visit advisors.vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.

All investing is subject to risk, including possible loss of principal.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer's ability to make such payments will cause the price of that bond to decline.

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