My First Look at Vanguard Ultra-Short Bond ETF (BATS:VUSB)


Dilok Klaisataporn

(This article was co-produced with Hoya Capital Real Estate)


With inflation topping 9% in June, speculation is how much the Federal Open Market Committee, or FOMC, will raise the federal funds rate at its July meeting; maybe even 100bps later June inflation figures!

Data by YCharts

The following chart shows how far AAA and BBB effective yields on corporate bonds have moved since the Fed began raising rates in 2022 as inflation moved past the “transitional”.

Data by YCharts

Investors trying to protect their fixed income allocation can turn to CDs, which eventually saw rates soar above next to nothing, although still tiny relative to inflation. US Treasury I-Bonds beat inflation, but investment caps prevent them from becoming a meaningful percentage of a large portfolio; In addition, there are liquidity problems. Thus, short-term ETFs like the Vanguard Ultra-Short Bond ETF (BATS: VUSB), have attracted assets over the past year. That said, and even with its term yield close to 1.5%, investors should consider short-term CDs which yield even more.

Explore the Vanguard Ultra-Short Bond ETF

Seeking Alpha describes this ETF as follows:

The fund invests in fixed income securities markets. It invests primarily in high quality securities rated A3 or better and medium quality securities rated Baa1, Baa2 or Baa3 by Moody’s Investors Service, Inc. The fund seeks to invest in securities with a maturity of 0-2 years. The fund uses fundamental analysis with a bottom-up and top-down stock selection approach to create its portfolio. The VUSB ETF was created on April 5, 2021.

Source: VUSB

Vanguard provides this investment risk warning for VUSB buyers:

Although short-term bond funds tend to have higher yields than money market funds, their stock prices fluctuate. As the Ultra-Short Bond ETF will expose investors to primary risk, the fund should not be considered a substitute for a money market fund. In addition, increases in interest rates may cause the price of the bonds in the portfolio, and therefore the price of the fund’s share, to fall.

Source: VUSB

VUSB has $1.75 billion in assets and incurs 10 basis points of fees from Vanguard. The 12-month return is 0.56%, but payouts have increased. The SEC yield of VUSB is 2.98%.

Asset review

Vanguard provides the following wallet features for VUSB.


With an average coupon of 2.5%, the ETF’s return should improve going forward. The short maturity allows for quick turnover, which is good when rates are rising. With YTM above WAC, there is potential price appreciation as bonds mature. The ETF holds almost exclusively investment grade bonds, although most are rated in the lower categories of this classification.


With companies representing 63% of the portfolio, the breakdown of issuers shows that almost half of these bonds were issued by industrial companies and the majority of the rest by financial companies. Another site shows VUSB with a 20% allocation to foreign bonds, so I’m not sure why here it’s less than 2%, unless they’re included in the other categories.

Vanguard Ultra-Short Bond ETF VUSB

Almost 60% of the portfolio matures within a year, most of the rest within 1-2 years.

top 20 holdings

short ulna bottoms; compiled by author

The Top 10 is equivalent to 12.3% of holdings; the Top 20, 17.5%. Vanguard lists two treasury bills and a cash fund as ST reserve assets with a combined weighting of 16.6%. VUSB is also short (61 contracts) on the US 5YR NOTE SEP 22 and long (305 contracts) on the US 2YR NOTE SEP 22. Without coupon data in the export version of the holdings, I was unable to to calculate an accurate average bond price as VUSB might hold zero coupon bonds.

Cast Review

Ultra-short bond ETFs DVD VUSB

After a slight dip in April, the payout has increased for three consecutive months, with the latest payout yielding an annualized return of 1.3%.

Performance review

Data by YCharts

So much for short-term ETFs protecting an investor’s assets! Although this is better than funds with longer durations, as shown below, VUSB has also tracked similar funds.

Fund comparisons

Once an investor has decided to add a short-term fund, comparing funds is the next step. Seeking Alpha’s Peers feature or search engines are a good place to start. I found a few and narrowed the list down to those bottoms to see how they fared against VUSB. Asset allocations and credit ratings are important when comparing fixed income funds. Some match VUSB better than others. The high-level asset allocations are:


Alpha ticker homepage search; compiled by author

ICSH ETFs 06/30/22

Since VUSB launched in May 2021, it has lagged the performance of all five competing funds. It also had the worst StdDev value.

Portfolio strategy

While the above only shows data since May 2021, the following, with the exception of VUSB, shows more history for other funds during times like today.

VUSB only existed for the latest data set and shows the poorest results so far. Note that the five oldest funds have performed better in past periods than the two most recent. Maybe the past is less reliable or the fact that inflation is much worse this time plays a role.

For longer results, I removed VUSB and re-ran the PortfolioVisualizer screen, this time with data going back to 2018.

ULST Symbol

Based on the asset allocation match to VUSB, more history does not support owning VUSB as the fund with the closest corporate weighting, SPDR SSGA Ultra Short Term Bond ETF (ULST) did the least well. That said, the next closest, the JPMorgan Ultra-Short Income ETF (JPST) did the best. Of course, it is today’s allocations that could differ greatly from the past.

With 6-month CDs yielding 2.5% and 1-year CDs at 3%, investors who know they won’t need to touch these funds, nor hold to buy other types of assets, should consider the safest choice (and currently the highest earning one) and use CDs for a portion of their short-term fixed income allocation.


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