Look back to go forward.
– Sir John Templeton
The Vanguard Short-Term Treasury ETF (NASDAQ:VGSH) invests in one of the safest and most conservative segments of the market by investing in fixed income markets of the United States. If you’re worried about stock markets at this stage, this might be a great place to park some of your cash and collect some yield. VGSH primarily invests in short-term investment grade fixed income securities issued by the US Treasury with maturities between 1 and 3 years, although it does not invest in inflation protected securities. The fund seeks to replicate the performance of the Bloomberg Barclays US. Treasury 1-3 Year Bond Index.
The Vanguard Short-Term Treasury ETF seeks to provide its investors with current income with modest price fluctuation. It achieves this by investing primarily in a basket of high-quality AAA rated (investment grade) bonds. The fund has a target allocation of investing at least 80% of its assets under management in bonds included in the index.
The graph clearly shows that the price of Vanguard Short-Term Treasury ETF started increasing towards the end of February and reached its peak towards the end of March of 2020 as the Federal Reserve dropped interest rates to near zero (the price is inversely related to rates). This comes as no surprise as the economic chaos caused by the coronavirus pandemic meant that investors sought the safety of bonds and US Treasuries and the increase in demand naturally led to an increase in price among the Monetary stimulus.
However, even with the magnitude of the economic changes being felt at the time, the price of the fund showed only a modest increase from under $61 to just over $62. And yet it is exactly this kind of stability that the investors are looking for in such a fund.
99.76% of the fund’s assets under management are allocated to government bonds, and of those, 99.62% are invested in AAA-rated bonds.
Compared to the S&P 500, the total return of the fund has been very stable, showing none of the fluctuations exhibited by the S&P 500. On the flip side, the fund’s total return is also unable to show the impressive returns that S&P 500 is now showing having moved into positive territory. However, this is to be expected given the nature of the US Treasuries.
All this goes to show that with the coronavirus pandemic having spread across the globe, and having disrupted global supply chains and economic activity, the recessionary environment in the US is still felt to be in full swing. And with these depression-like circumstances, the Federal Reserve was prompted to go for emergency rate cuts (twice in less than two weeks), trimming its target interest rates to a range of 0% to 0.25%. Such factors have made investing in fixed investment funds all the more attractive.
Looking at the dividend growth history, we see a clear incline in the dividends paid out to investors. Analyzing the dividend further against market realities offers more insight.
The fund has shown a healthy dividend yield of 1.48%, with the dividend increasing with a 41.32% average growth rate over the past 5 years. However, this is even more impressive knowing what has happened to US Treasury yields.
The decrease in interest rates by the Federal Reserve to shore up the economy was coupled with the increase in demand for safer US Treasuries which led to their increased prices. These two factors combined to result in a record decline in yields, taking them to the neighborhood of 0%.
It is also worth noting here that where stocks certainly tend to produce the highest returns over long time periods, they are also relatively volatile over shorter time periods as we have seen in our previous analysis. Therefore, when it comes to investing in an age-appropriate combination of stocks and bonds, treasury bond based ETFs provide another valuable avenue to hedge against short-term volatility while providing an appropriate return on the investment in the form of dividend yield. If you’re one of those investors worried about the after effects of a politically fraught election, this might be a good place to at least get something on your cash while you wait for more certainty.
Moreover, government bonds, such as treasuries, tend to pay relatively low dividend yields when compared with corporate bonds. But more importantly for the risk-averse investor, US Treasuries also have significantly lower risk as they are fully secured against default. US Treasuries, it goes without saying, come with the full faith and sovereign backing of the United States Government.
Given how expenses can eat away at investors’ returns over time, it is encouraging to know that the fund has one of the lowest expense ratios in the market, standing at only 0.05%. Especially over the long term, this will allow investors to enjoy greater returns on their investment. Combined with the added attraction of the fund being one of the cheapest in the market makes it a compelling choice for investors to get exposure to short-term US Treasuries.
The fund is a very safe bet as capital is secure and protected from any possible default. The main risk from an investment standpoint then stems from the opportunity cost for risk seeking investors of allocating their capital in equities.
Even with the existing volatile environment of the markets, there are still some market segments that are not only surviving but thriving and providing impressive returns to investors. The technology and e-commerce sectors are good examples of sectors having experienced this phenomenon.
The Vanguard Short-Term Treasury ETF is a safe and sound fund with investments in US Treasuries that are essentially safe from default. With the bonds being invested in having maturities ranging from 1 to 3 years, the added benefit being offered is insulation from significant price fluctuations. This is on top of the fund having a healthy dividend yield compared to the decline in interest rates. Possessing these qualities is a good safe-haven investment for investors seeking refuge from the market storms.
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