Risk in the portfolio: Attractive yields
INVESTMENT OUTLOOK
Risk in the portfolio: Attractive yields
How are you currently thinking about risk in the portfolio? In this new series, we’ll look at opportunities in fixed income to help you navigate credit spreads, equity valuations, and uncertainty in today’s markets.
Fixed income markets are offering yields much higher than recent history
Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Source: FactSet as of 12/31/2024 - 5/31/2025
Notes: The chart displays daily yield-to-worst figures over time on the Bloomberg U.S. Aggregate Index. The yellow line denotes the average yield over the stated period. Blue lines indicate one standard deviation above and below the mean.
The financial landscape has shifted significantly over the past two decades. By analyzing the yield to worst of the Bloomberg U.S. Aggregate Index, we can observe that the prolonged low-interest rate environment is well behind us. We are now in a phase that bears a closer resemblance to the era we were in before the Great Financial Crisis.
The challenge for us as investment professionals is not to just think about fixed income over the most recent time frame, but to shed that recency bias and think about the next 10 years. There is an opportunity in fixed income given higher interest rates. This could result in your clients possibly earning a real return from quality bonds.
Think about your clients—specifically, how much money you’ve helped them make in the equity markets over the last 10 to 15 years. With that amount in mind, they may not need to take on as much risk going forward. In those 10 to 15 years, their goals may have changed from accumulating wealth to preserving capital in their retirement planning strategy.
In those instances, it’s vital to be having discussions about how to incorporate fixed income a bit more going forward–one reason is attractive top line yields. Ultimately, being prudent in risk taking and fixed income could be a great conversation to have with clients.
Expert insights from Sara Devereux
Get insights on leveraging fixed income for your clients.
Fixed income solutions tailored to client needs
The way your clients process changing market conditions reflects specific needs, risk tolerances, and goals that also guide how you construct the fixed income portion of their individual portfolios. We’ve assembled these conceptual portfolios to guide how you align the appropriate fixed income opportunity with the power of behavioral coaching. Consider them as a launching point for how you can customize fixed income holdings according to your clients’ unique objectives.
Diversify risk
Concerned about volatility and reduction of principal.
Total return
Comfortable with higher volatility in exchange for higher potential returns.
Income
Rely on bond income to meet spending needs.
Bonds to diversify risk
Client type:
They’re concerned about volatility and don’t want to risk spending down principal.
Action:
Pair high-quality bonds with traditional equities or separately managed accounts.
Investments to consider:
- VCRB Core Bond ETF
- VGSH Short-Term Treasury ETF
- VGLT Vanguard Long-Term Treasury ETF
- BNDX Total International Bond ETF
- VGIT Intermediate-Term Treasury ETF
- VMBS Mortgage-Backed Securities ETF
Behavioral coaching takeaways:
- Address client anxieties by emphasizing that high-quality fixed income investments such as Treasury, core bond, and intermediate-term corporate bond fund investments often move in the opposite direction of equities when the stock market sells off.
- Reassure clients that their goals can still be within reach because they prepared this way for equity market downturn scenarios.
Bonds seeking total return
Client type:
They’re comfortable with higher volatility if it means an opportunity for higher potential returns.
Action:
Pursue a balance between exposure to higher quality Treasury and Core bonds and lower quality high-yield bonds and combine with other asset classes for diversified return.
Investments to consider:
- VPLS Core-Plus Bond ETF
- VGSH Short-Term Treasury ETF
- VGLT Long-Term Treasury ETF
- VCIT Intermediate-Term Corporate Bond ETF
- VWEAX High-Yield Corporate Fund
- VEGBX Emerging Markets Bond
- BNDX Total International Bond ETF
Behavioral coaching takeaways:
- When clients’ portfolios are well-diversified, clients are more likely to have exposure to whatever is performing well.
- Any impact from exposure to poorer-performing asset classes will be limited and offset by other assets performing well.
Bonds for income
Client type:
They need bond income to meet their spending needs.
Action:
Allocate to bonds with greater credit exposure. This can include diversified active bond funds, active/passive ones, high-yield, and active multi-sector, among others.
Investments to consider:
- VMSAX Multi-Sector Income Bond Fund
- VCSH Short-Term Corporate Bond ETF
- VEGBX Emerging Markets Bond Fund
- VWEAX High-Yield Corporate Fund
- BND Total Bond Market ETF
Behavioral coaching takeaways:
- Having a steady income stream in the portfolio can relieve the pressure of having to sell equities to fund spending needs.
- Emphasize to clients that current rate levels are relatively high, both historically and compared against the current dividend yield for equities.
Client-specific solutions
Dive into the favorable environment for bonds and solutions designed to meet your clients' specific needs.
Have questions about fixed income? Contact us.
Disclosures and footnotes
For more information about Vanguard funds or Vanguard ETFs, visit vanguard.com or call 800-997-2798 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information [[about a fund]] 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 possible loss of principal. 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.
Diversification does not ensure a profit or protect against a loss.
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.
Investments in bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.
U.S. government backing of Treasury or agency securities applies only to the underlying securities and does not prevent share-price fluctuations. Unlike stocks and bonds, U.S. Treasury bills are guaranteed as to the timely payment of principal and interest.
Past performance is no guarantee of future results.
All investing is subject to risk, including possible loss of principal.
Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund's trading or through your own redemption of shares. For some investors, a portion of the fund's income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax.