Vanguard ETFs Show Recovery After Trump's Return: Is the Bounce Sustainable?

In the lead-up to Donald Trump's second inauguration as President of the United States, many stocks were gaining traction. However, bond markets portrayed a different picture. For instance, the Vanguard Long-Term Bond ETF (BLV 0.37%) saw a nearly 8% decline, while the Vanguard Long-Term Corporate Bond ETF (VCLT 0.29%) experienced a similar drop. These significant changes are notable within the bond fund space.

Nevertheless, an interesting turn of events unfolded during Trump's initial days back in the White House: several Vanguard bond ETFs began to recover. This has raised questions among investors — is the bond market on the mend, or should caution be exercised regarding this rebound?

Analyzing the Rebound of Vanguard ETFs

To make sense of the rebound observed in Vanguard bond ETFs, it's crucial to first comprehend the reasons behind their earlier declines. The prices of bond funds are directly tied to the value of the underlying bonds they hold. Typically, bond prices decrease when yields rise, and conversely, prices increase when yields fall.

Bond yields are generally influenced by interest rates. It would thus be reasonable to expect that when the Federal Reserve cut interest rates twice in late 2024, bond yields would drop, leading to a rise in bond prices. However, this was not the case.

Long-term bonds are generally more sensitive to interest rate shifts compared to short-term bonds. So, why did the Vanguard Long-Term Bond ETF and the Vanguard Long-Term Corporate Bond ETF decline even after the Fed's cuts? The bond market tends to look ahead, and investors appeared concerned about a rise in inflation that could, subsequently, lead to increased yields.

This begs the question: why would investors fret over inflation in light of the Fed's interest rate reductions? A significant part of the answer lies in fears regarding the inflationary effects of Trump's proposed tariffs. During his campaign, Trump indicated he would impose tariffs as high as 20% on imports to the U.S., with intentions to enforce even steeper tariffs on certain goods from specific countries upon taking office.

So, what triggered the recovery of Vanguard bond ETFs in the early days of Trump's second term? Among the executive actions taken post-inauguration, none involved implementing new tariffs.

Should Investors Exercise Caution?

It is advisable for investors to approach the recent upticks in Vanguard bond ETFs, particularly the Vanguard Long-Term Bond ETF and Vanguard Long-Term Corporate Bond ETF, with skepticism. Observations indicate that these rebounds are already beginning to show signs of diminishing strength.

Moreover, concerns relating to Trump's ongoing tariff intentions persist. After resuming the presidency, one of Trump's primary directives was the announcement of an 'America First' trade policy, which called for recommendations on measures to tackle trade deficits. This includes the prospect of a global supplemental tariff or similar actions.

Additionally, Trump mentioned intentions to enforce tariffs on Canadian and Mexican imports starting February 1, and even hinted at a possible 10% tariff on goods imported from China. Many economists believe these tariffs could escalate inflation, which spells trouble for long-term bond prices, including those of the Vanguard Long-Term Bond ETF and the Vanguard Long-Term Corporate Bond ETF.

Exploring Alternative Vanguard ETFs

Considering these potential pitfalls, investors might be better served steering clear of long-term bond funds for the time being. A more promising option appears to be the Vanguard Financials ETF (VFH 0.25%).

This ETF comprises a diverse array of 490 financial stocks, with key holdings including JPMorgan Chase, Berkshire Hathaway, Mastercard, Visa, and Bank of America. Such companies stand to benefit significantly from any deregulation efforts and potential corporate tax cuts likely to be championed during Trump's presidency.

While there are no assurances that the Vanguard Financials ETF will yield positive results for investors short-term, it presents a more favorable investment option compared to long-term bond ETFs at this juncture.

JPMorgan Chase is an advertising partner of Motley Fool Money. Bank of America is an advertising partner of Motley Fool Money. Keith Speights has positions in Berkshire Hathaway and Mastercard. The Motley Fool has positions in and recommends Bank of America, Berkshire Hathaway, JPMorgan Chase, Mastercard, and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.

Vanguard, ETFs, Bonds