Vanguard Intermediate-Term Corporate Bond ETF

VCIT

Market cap $58B

In a rate-hiking environment the last few years, short-term bonds have been the default exposure option. But as the bond market expects more rate cuts to come after September's drop of 25 basis points, investors may want to consider intermediate bonds as a way to maximize income.

Elected officials' continued debate about the budget on Capitol Hill could spur additional interest rate cuts. Given these current market forces, fixed income investors may want to reposition their portfolios to attain corporate bond exposure.

Market uncertainty continues to linger in the back of fixed income investors' minds. But that can force much-needed recalibration of portfolios as tariffs and rate cuts loom.

Intermediate corporate bond ETFs like VCIT have gained traction in 2025 as investors move away from ultra-short and long-duration funds. VCIT offers a ~5% yield and moderate rate sensitivity, putting it in a stronger position if the Fed follows through with expected rate cuts. Spreads are already near historic lows, which means most future returns will come mainly from yield rather than further credit revaluation.

ETFs pulled in $38B last week, led by QQQ, VOO, ARKK, ETHA and VCIT as cooling inflation and rate-cut hopes boosted markets.

Investors seeking a Goldilocks option to balance yield and rate risk may want to consider intermediate bonds. One fund that's coming off a strong second quarter and worthy of consideration is the Vanguard Interim-Term Corporate Bond ETF (VCIT).

The bond market looks increasingly focused on slowing economic growth vs. tariff inflation.

VCIT offers low-cost, diversified exposure to U.S. investment-grade corporate bonds, but does not outperform its benchmark after fees. Falling interest rates in 2025 could benefit VCIT, yet current market volatility and credit spreads pose risks to near-term performance. Rising BBB spreads and geopolitical tensions may increase volatility, negatively impacting VCIT's value in the short term.

In recent days, a new headwind is weighing on fixed income securities: a US government budget bill, which is expected to significantly raise an already hefty federal deficit in the years ahead. Long-term Treasuries are the biggest losers post-Liberation Day, based on a set of ETFs through yesterday's close (May 21).

There's still a lot of uncertainty in the bond markets, especially the corporate variety. But with tariff negotiations underway, especially with China, the pause could present investors with an opportune time to snatch up corporate bonds.