Are you simply looking for where to park your cash? Or do you have an emergency fund set up? If you are looking for ways to squeeze some extra returns out of your cash, but are looking at options other than a simple chequing account, ETFs that hold short-term securities might be of interest to you. But which one to choose? What are the best Vanguard ETF funds in the US for short-term securities?
In this guide, I’ll be taking a look at whether or not Vanguard offers funds where you can feasibly keep your extra cash and emergency money safe, and which are likely to prove most beneficial.
Which Vanguard ETFs are best for my emergency money?
Much like index funds, ETFs track an underlying index. However they bring the added flexibility of being traded continuously on an exchange, which means you can easily add or liquidate these holdings as per your need. Additionally, as you can buy just 1 share, aside from the cost of buying that share, there is no minimum investment threshold.
Based on a review of the options that Vanguard offers, here is my opinion on which are the best 3 Vanguard ETFs in the US for investing your cash while attempting to generate some returns from it as well.
VTIP – Vanguard Short-Term Inflation-Protected Securities ETF
This ETF tracks an index that measures the performance of inflation-protected US treasuries (TIPS) that have a remaining maturity of less than 5 years. As this fund has securities that have a relatively lower duration, its sensitivity to interest rate movements is low. On the flip side, you can still benefit from getting payouts that are linked to inflation, so you can preserve your capital when interest rates increase in an inflationary environment.
It’s important to note that VTIP is not a money market fund as it doesn’t hold cash-like securities. Nevertheless as it is focused on inflation-protected short-term US government bonds, it does come fairly close to being a money-market like fund. The benefit of being in a VTIP compared to a VMRXX or VMFXX is that you will likely generate a higher return over a multi-year period.
The ETF generally trades around the $50 mark and the expense ratio is a miniscule 0.04%. The dividend yield (30-day SEC yield) is 2.33%. The inflation-protection means that the ETF will continue to deliver a reasonable performance in a high-inflation environment.
| Period | VTIP Total Return |
|---|---|
| 1-year | -2.98% |
| 3 years | 2.39% |
| 5 years | 2.50% |
| 10 years | 1.30% |
The fund did have some negative return quarters. It’s worst stretch was in 2022 when it was down around 4.2% cumulative from Q1 to Q3. Prior to that in 2014, it was down a slightly worse 4.5% over 3 quarters sequentially (~1.5% in each quarter). So on a $1,000 investment, you would have been down $45 in either of those periods. This of course makes it more volatile than money market funds, but on the flip side, it does deliver somewhat higher returns when held for a medium to long term.
It will be interesting to see how the inflation vs duration trade-off affects this fund in the coming few quarters. Nevertheless, despite some volatility it should still be a reasonable option for your emergency fund.
The expense ratio is 0.04%, so its negligible for nearly all types of investors.
If you’d rather own this fund in a mutual fund format, Vanguard’s equivalent product in the mutual fund wrapper is VTAPX.
VGSH – Vanguard Short-Term Treasury ETF
Staying on the theme of short-duration high quality funds, VGSH invests primarily in US treasury bonds with a maturity between 1 to 3 years. This combination reduces the sensitivity of the underlying bonds, and hence the ETF, to any changes in interest rates. This bond has slightly lower volatility than VTIP, but also delivers slightly lower returns.
| Period | VGSH Total Return |
|---|---|
| 1-year | -3.84% |
| 3 years | -0.50% |
| 5 years | 0.70% |
| 10 years | 0.59% |
In the context of the rising interest rates, the ETF had a return of -3.84% in the past 1 year. This means that $1,000 invested in the ETF would have lost about $38.40 in value. 2021 was also a negative return year, so despite the high quality underlying assets, the two-year returns have not been stellar.
The 3-year return is a compounded -0.50%, which means you would have lost roughly $5 in value each year (even after accounting for the dividend) on a $1,000 investment. In other words, you would be left with $985 now. It’s not a disaster by any means!
There is no minimum investment required (aside from the cost of buying your first share) and the expense ratio is again a very low 0.04%. The fund has a now-healthy dividend yield 4.36% (30-day SEC yield).
BSV – Vanguard Short-Term Bond ETF
This fund is similar to VGSH in duration (1 to 5 years), however it takes slightly higher risk (going up the credit curve) by also investing in investment-grade corporate bonds and international dollar-denominated bonds. As of writing this piece, 67.5% of the fund is invested in US government securities and a further 20.1% is invested in A-rated or higher securities.
As you start to stray away from the highest quality and lowest duration securities, the interest rate sensitivity starts to increase. It’s therefore not surprising that the fund has delivered -5.49% return in the last 1 year. This means that on a $1,000 investment, you would be down around $55 so far.
| Period | BSV Total Returns |
|---|---|
| 1-year | -5.49% |
| 3 years | -0.71% |
| 5 years | 0.81% |
| 10 years | 0.90% |
You wouldn’t be out of place if you’re asking the question, why even bother investing here? The answer is that relative to VTIP, this fund has delivered better returns in some years. The recent weakness just drags down the overall longer-term numbers. To be honest, we’re likely splitting here when trying to compare BSV with VTIP. Even if you just owned VTIP, you would be perfectly fine.
There is no minimum investment threshold for BSV and the expense ratio is 0.04%. The dividend yield is 4.33% (30-day SEC yield), which is the highest amongst the funds we looked at so far.
Before You Go…
ETFs holding short-term securities are typically a good way to hold assets that are nearly cash-like in terms of retention value. The recent hikes in interest rates have of course dented their returns, but from here on ahead, there’s likely somewhat smoother sailing.
If you are looking for other options to invest in, Vanguard’s money market funds are also a great option to consider. Take a look at the article for further information. I hope you find it useful!
