Got Cash? Short-Term Bond ETFs Can Fix That

Shorter doesn’t always mean less. Investors are increasingly piling into short-duration bond ETFs, which invest in debt securities with shorter maturities, usually between one and three years (but some with less than a year). The ultrashort bond category had its highest inflows on record last month, topping $24 billion. High yields for ultrashort-term bonds mean these funds can be an attractive alternative for investors looking to house their excess cash. Short-term bond ETFs also regularly outperform bank savings account yields and average CD rates, according to a recent BlackRock report. It’s an appealing option for advisors looking for a place to house clients’ cash. “We’ve seen short-term yields elevated for a bit of time now, and that’s put a spotlight on a lot of these ETFs,” said Paul Olmsted, senior analyst of fixed income strategies at Morningstar. “Some [bank] products … aren’t yielding much at all. Investors are becoming more aware of this and realizing, ‘Hey, if I can earn 50 basis points more versus money markets … I want to do it.’” The funds can also offer both diversification benefits and higher yield with relatively lower risk, specifically duration risk, or the risk of the price of a bond decreasing if interest rates rise. The investing environment was, up until early last year, considered an inverted yield curve, meaning long-term interest rates were lower than short-term ones. That further fed investors’ appetite for these funds, Olmsted said. Some of the highest-yielding short-term bond products include: - The JPMorgan Ultra-Short Income ETF (JPST), which has $37.5 billion in assets and a dividend yield of 4.36%. - The Fidelity Low Duration Bond Factor ETF (FLDR) manages $1.38 billion and has a yield of 4.54%. - The State Street SPDR Bloomberg Investment Grade Floating Rate ETF (FLRN), which oversees $2.79 billion and has a yield of 4.69%. Time to Kill: Still, ultrashort isn’t for everyone. These products are best for someone with a longer time horizon who can take on more risk, Olmsted said. Another option is in a fixed-income portfolio comprised mainly of core bond funds (like those investing in government, corporate and securitized debt). Taking a portion of the money invested in those core bonds and putting them in short-term or ultrashort bond funds can help diversify and reduce duration risk. “If you have an interest rate view, you can express it by putting something in a short-term or ultrashort-term ETF,” he said. “You can put your money in a safe spot, get a reasonable yield in a diversified ultrashort ETF. And there are some very good ones out there.” The post Got Cash? Short-Term Bond ETFs Can Fix That appeared first on The Daily Upside.