Nudge clients toward duration with an ultra-short bond fund

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Nudge clients toward duration with an ultra-short bond fund

Vanguard Perspective


May 7, 2024

In our recent conversations with advisors, there’s been a noticeable shift. Not that long ago, many advisors were asking, “Should I increase my clients’ bond portfolio duration?” Increasingly, advisors are instead asking, “How should I add duration?”

Now, many advisors have already begun moving down that path using active bond products. Industry flows into active taxable bond funds were $77.5 billion in the first quarter of 2024, according to Morningstar. But there remain a few critical factors that may cause hesitation in moving out of cash or T-bills:

  • The economic and market outlook remains uncertain, including the future path of interest rates.
  • Because of the inverted yield curve, cash and T-bills offer attractive yields with lower interest-rate risk and no credit risk.
  • Some clients need coaching to get comfortable redeploying cash.
  • Deciding what types of bonds to invest in can be challenging.

However, as advisors seek to reallocate to bonds across the curve, they should also consider the attractive opportunity in short-term bonds. Moving from cash to short-term bonds can give investors access to similarly attractive yields while also allowing them to lock in these yields for longer. They can also gain incremental protection against equity volatility in their overall portfolio through adding some duration.

VUSB can offer value across a variety of potential economic and market outcomes.

There is no one-size-fits-all answer to a question that depends so much on the individualized needs of your clients.  However, you may find that Vanguard Ultra-Short Bond ETF (VUSB) can be an easy first step as an alternative to cash for many of your clients. 

With an average duration of one year, VUSB invests only a little farther out on the yield curve than cash products. VUSB invests in high-quality credit bonds which provide a potential yield advantage relative to T-Bills without significant credit risk and are managed by Vanguard’s active taxable fixed income team.

Stronger than expected economic data year-to-date have driven further uncertainty about the near-term market and economic outlook. However, we believe VUSB is likely to provide value to clients’ portfolios through varying environments.  If the economy performs better than expected—growth and employment remain strong, and inflation is sticky—interest rates on short-term bonds will likely remain elevated or rise modestly. Our fixed income professionals view credit, particularly the high-quality bonds in which VUSB invests, as well-positioned and at limited risk in this scenario. VUSB’s minimal interest-rate risk and high-quality credit focus mean it is likely to hold up well in this environment.

If the economy performs worse than expected as the long lags of restrictive policy take effect, the Fed will likely respond by making several rate cuts.  Interest rates on short-term bonds would fall from current levels, and credit would likely sell off. However, because of the strong starting point of investment-grade fundamentals, our fixed income experts do not expect severe credit underperformance in this environment. Further, VUSB’s roughly one-year duration may provide some price appreciation cushion to offset credit weakness or volatility in investors’ equity portfolios—a feature cash or T-Bills don’t provide. Moreover, interest rates on cash or T-Bills would reset quickly, while VUSB investors would have locked in today’s higher rates for a longer period. It’s important to keep in mind that longer-dated higher quality bonds will likely outperform short-credit in this environment.

VUSB may be a helpful tool to move clients’ short-term portfolios from cash to bonds a little farther out in the yield curve without significant additional risk.

Learn more about VUSB

For more information about Vanguard funds or Vanguard ETFs, visit 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.

Vanguard ETFs are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETFs 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.

All investing is subject to risk, including the possible loss of the money you invest. 

Vanguard is owned by its funds, which are owned by Vanguard’s fund shareholder clients. 

Diversification does not ensure a profit or protect against a loss.

Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments.

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