When will the Fed cut rates? Find out how Vanguard Ultra-Short Bond Fund can help soften the blow

There’s a lot of uncertainty about when interest rates will start their decline. Will the Fed make multiple cuts this year? Or will a hot economy and persistent inflation put a damper on those plans?

Amid all the questions, clients may feel like their safest option is to remain in cash or money market funds, where rates remain relatively high. That feeling of safety, however, may come at a cost. When rates start falling, they often plummet. Waiting may put clients at risk of missing an opportunity to reinvest now when yields remain near levels we haven’t seen in decades. And trying to time the market is a no-win game.

Move away from cash

For clients who are reluctant to move away from cash, you may want to nudge them to extend duration with an ultra-short bond fund or ETF, such as the Vanguard Ultra-Short Bond ETF (VUSB). Even with today’s inverted yield curve, VUSB can offer similar yields to money market funds while allowing investors to lock in higher yields for longer—roughly 1-year duration. We believe VUSB can offer value in a variety of potential economic scenarios.

VUSB can also play multiple roles in your clients’ portfolios: 

• As an evergreen holding for liquidity in the portfolios of clients who may need cash in the next six to 18 months.
• To lower the duration of a broader portfolio of intermediate-term bonds or bond funds.
• In today’s yield curve environment, it could be a first step to take now for clients who are overweight to cash and would benefit from taking a small step to add duration to their bond sleeve.
• In a normal, upward-sloping yield curve environment, to access higher yields than money market funds with incremental credit and interest rate risk.

What makes VUSB tick?

Different ultra-short funds can vary significantly in where they are invested across the curve and in the types of debt in which they invest. Some focus solely on government debt, others on credit. Some are very short-term, while others have more duration. VUSB focuses on high-quality credit and: 

• Seeks current income with limited price volatility.
• Invests primarily in short-term investment-grade corporate bonds and high-quality asset-backed securities.
• Takes roughly equivalent levels of credit and interest-rate risk, at around 1-year spread duration and duration, respectively.
• Has an average maturity of zero to two years and an average credit quality of AA.
• Limits high-yield debt to 5% of the portfolio.

Find value at a low cost

VUSB’s expense ratio is 0.10%, compared to 0.41% for the Morningstar peer average as of February 29, 2024.

As one of the largest managers of bond funds, you’ll get:

• More than 40 years of managing active fixed income in every kind of market.
• A deeply talented team of more than 100 investment professionals with experience across all sectors and sub-asset classes.
• More than $438 billion* in active taxable and municipal fixed income assets.
• A disciplined approach with tight risk controls and a commitment to staying true to the character and objective of each fund.

Learn more about VUSB

*Source: Vanguard

For more information about Vanguard funds or ETF Shares, visit 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.

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.

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.