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Vanguard Short-Term Treasury ETF Offers Safety But With A Low Yield

Published Fri, 12 Jun 2020 05:07:22 -0400 on Seeking Alpha

VGSH invests in U.S. short-term treasuries.
The fund has very little credit risk as all of the bonds are backed by the full faith and credit of the U.S. government.
VGSH also has little interest rate risk as most of the funds in its portfolio will mature between 1 and 3 years.
However, investors will only receive an average yield to maturity of only 0.2%.
ETF Overview
Vanguard Short-Term Treasury ETF (VGSH) focuses on short-term investment-grade bonds in the United States. VGSH has very low credit risk as its portfolio of U.S. treasuries are backed by the full faith and credit of the U.S. government. It also has a very low interest-rate risk due to its short average duration to maturity years. However, its yield to maturity of 0.2% is low and hence it will not be suitable for investors who want higher yields.
Data by YCharts
Fund Analysis
If safety is your number 1 concern, VGSH meets this criterion
For investors who want safety, VGSH may be a good choice for you. The name of the fund, Vanguard Short-Term Treasury ETF, means that its portfolio of bonds is all U.S. treasuries. This is probably one of the safest bonds to hold on earth right now as they have superior credit ratings. Since the formation of the U.S. government in 1776, the U.S. Treasury has never failed its lenders. In a post-COVID-19 world where many other emerging markets are still struggling to contain the virus, treasuries backed by the full faith and credit of the U.S. government should be extremely safe.

Source: Vanguard Website
VGSH’s low average effective maturity year means interest rate risk is low
VGSH tracks the Bloomberg Barclays U.S. Treasury 1-3 Year Index. This index includes U.S. treasuries that will mature between 1 and 3 years (see table below). In fact, its average effective maturity year is about 2 years.

Source: Vanguard Website
We know that some bonds have very long maturity years such as 20-year U.S. treasuries. Therefore,... Read more

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