WEEKLY BRIEF | The Waiting Game

Hello, and welcome to the IVA Weekly Brief for Wednesday, September 15.

There are no changes recommended for any of our Portfolios.

Federal Reserve policymakers are all but certain to raise the benchmark fed funds rate by 25 basis points (0.25%) at today's meeting, lifting the target range for overnight loans between banks from 3.50%–3.75% to 3.75%–4.00%. In the options market, traders are pricing the move as a near-certainty, and the case is straightforward: unemployment has fallen from 4.5% to 4.1% over the past year, and inflation has run above 3% for six months.

Of course, Fed Chair Warsh could still surprise the market. But assuming policymakers deliver the expected hike, what should you do?

Trading around Fed decisions is harder than it looks. The bond market typically moves ahead of the actual announcement. The 10-year Treasury yield, for example, has already climbed from 4.76% at the end of August to 5.01%—a move that essentially means interest rate hike expectations are priced in.

That said, as I showed you a month ago, cash yields are where Fed moves show up most reliably. I expect Federal Money Market’s (VMFXX) yield to rise from today’s 3.63% level toward 3.85% over the next month or so.

Cash Plus Account and Cash Deposit should follow with higher yields too. However, Cash Plus is shifting to a two-tier structure (which I wrote about here) at the start of October, so I’ll be watching (and reporting on) how that affects its yield.

Should you ditch bonds (and bond funds) with the Fed hiking?

No. First off, I don’t make all-in or all-out calls—I believe in time in the markets and diversification. So, bond funds still have a place in the IVA Portfolios. However, I hold more cash (which is about to start paying more) than bonds—reflecting my preference for the stability and predictability of cash in today’s shock-filled world where the risk of rising inflation (which likely means rising interest rates) outweighs the risk of a recession (and falling interest rates).

The case for holding bonds, which I laid out at the end of August, hasn't changed: buying bonds today locks in a decade of decent income. A 10-year Treasury bought today yields roughly 5% a year for ten years—the best return from safe Treasuries in roughly two decades.

Emerging Market News

First up: Vanguard has delayed the launch of the Emerging Markets Bond Active ETF (VEMB) from mid-September (as originally scheduled) to mid-October at the earliest. I wouldn't read much into it, as Vanguard has made a habit of pushing back ETF launches. Given the firm's push to expand its actively managed bond ETF lineup, it's only a matter of time before this one lands.

It's worth the wait. The new ETF will mirror the legacy Emerging Markets Bond (VEMBX) mutual fund, which has consistently beaten its in-house index competition. I’ll have more on that in next week's IVA Research piece on Vanguard's foreign bond funds.

Second: Baillie Gifford's Andrew Stobart—one of the portfolio managers on Emerging Markets Select Stock (VMMSX)—is retiring in six months, on March 31, after a 35-year career. Shareholders are unlikely to notice a difference.

Baillie Gifford has a deep bench, and the firm is just one of three sub-advisers on the fund—responsible for about 40% of its assets. No single manager has an outsized impact on the fund's results—that's by design.

PRIMECAP Odyssey Discovery ETF Update

Ok. This isn’t much of an update, but many of you have written in asking when PRIMECAP Management’s first ETF—Odyssey Discovery ETF (POMG)—will start trading.

The short answer is, I don’t know for certain. At the end of August, PRIMECAP filed Form 8-A to register the shares with the SEC so they can trade on an exchange—the NYSE Arca, in this case. It’s a necessary step to launch the fund, but it doesn’t mean we can buy the ETF yet.

An 8-A form is usually filed within days of a listing, and it's been nearly three weeks. So, hopefully the wait is almost over. PRIMECAP tells me they aren't commenting. I’ll let you know as soon as I know more.

Our Portfolios

Our Portfolios are showing solid returns for the year through Tuesday. The Aggressive Portfolio is up 12.8%, the Aggressive ETF Portfolio is up 11.1%, the Growth Portfolio is up 11.5%, the Moderate Portfolio is up 11.0% and the Conservative Portfolio is up 6.5%.

This compares to an 11.9% return for Total Stock Market Index (VTSAX), a 14.0% gain for Total International Stock Index (VTIAX), and a 1.4% decline for Total Bond Market Index (VBTLX). Vanguard’s most aggressive multi-index fund, Target Retirement 2070 (VSNVX), is up 11.4% for the year, and its most conservative, LifeStrategy 20/80 (VASIX), is up 1.5%.

IVA Research

Tuesday, I continued my tour of Vanguard's bond lineup, tackling Treasury Inflation-Protected Securities (TIPS)—how they work and whether now's the time to buy. Read it here.

On Thursday, I'll close out my look at Vanguard's U.S. taxable bond funds. The firm now offers three ways to buy junk bonds—and I've got a clear favorite of the three.

Until my next IVA Weekly Brief, have a safe, sound and prosperous investment future.