3 ETFs That Provide a Middle-Ground Solution for Bond Volatility

With a forthcoming election paired with the expectation of rate cuts, the bond market could see volatility in the second half of 2024. That said, investors may want to opt for a middle-ground solution for yield and rate risk with intermediate-term bond funds.

Short-term bond funds have been the default play the last few years amid rising interest rates. But that strategy could be changing as rate cut expectations increase.

“Once the Federal Reserve begins to cut rates, yields on short-term investments should begin to fall, and investors may be faced with lower yields when their maturing bonds come due,” noted Collin Martin, fixed income strategist at Charles Schwab. “Intermediate and long-term Treasury yields are still near their highest levels in 15 years, so we’d rather lock in those high yields with certainty rather than risk reinvesting at lower yields once the Fed does begin to cut rates.”

While long-term bonds can offer greater yield, intermediate bonds can walk the line between mitigating rate risk and attaining yield. Given this, investors may want to consider a fund like the Vanguard Intermediate-Term Bond ETF (BIV).

According to its fund description, BIV tracks the Bloomberg U.S. 5-10 Year Government/Credit Float Adjusted Index. That is a market-weighted bond index that covers investment-grade bonds with a dollar-weighted average maturity of that intermediate range of five to 10 years.

BIV can give investors broad and diversified exposure to intermediate bonds. But given Vanguard’s suite of bond ETFs, they can also tailor their exposure to certain corners of the bond market such as Treasuries and corporate bonds while still maintaining exposure to intermediate debt.