Short-Term Bond ETF Investors May Be in for a Treat

Capital appreciation on top of high yields might be a real possibility.

TwitterTwitterTwitter
RobIsbitts310x310
|
Reviewed by: etf.com Staff
,
Edited by: Ron Day

It is like the solar eclipse of ETF investing. It doesn’t come around often, but when it does it is an event. In this case, it is OK to look directly at it.

I’m talking about the possibility that, as we last saw during the heart of the pandemic stock market mess of early 2020, short-term US Treasury ETFs such as the $5.1 billion SPDR Portfolio Short Term Treasury ETF (SPTS) and other ETF like it provided investors and financial advisors with uncommon returns for an asset segment that doesn’t take much risk.

Specifically, using SPTS as an example, it gained 2.5% in price in the first six months of 2020. Now, back then the yield was only about 0.8% since this was when bond rates went from years of being low to going way, way lower. It was like what comedian John Oliver says about hitting “rock bottom,” typically when referring to U.S. politics: You hit rock bottom, you keep digging and digging and keep going, then stop. That’s how low rates went. Way below rock bottom.  

History On the Side of Advisors and Clients

Like a comet, that minor miracle that occurred in 2020, and before in 2016 when the price return of ETFs like SPTS was more than 1.8% in six months, might be coming our way again. This is because short-term rates are high and showing early signs of dropping, maybe rapidly. The starting point for yields this time around is well above those past periods.  

It is not inconceivable that a combination of 2.5% yield for a half a year, plus 1.5% or more in price gains from falling yields, could net these “akin to money under the mattress” ETFs a return of 4% or more in six months. And not that any of us is hoping for a recession, but a steep one that prompts massive Fed action, like what may already be underway in Europe and Canada, could produce 12-month returns in ETFs of this type that can reach 7%-8% or more.

Now, this is all assuming things play out in a precise manner. But just the potential for it to occur, even partially, in 2024 and into 2025 could be a game-changer for advisors who are looking everywhere for a combination of yield and total return for clients.

Short Term Bond ETFs: Low Risk, High Yields 

Remember that the expected returns of these vehicles are around the same as their dividend yields, which today are around 4.5%. Imagine producing “alpha” of a few percentage points beyond that, with a risk level that is practically nil. Remember that these ETFs invest in US Treasuries and/or high-grade corporate bonds which mature typically in one to three years’ time.  

Investing is all about return for the risk taken. The risk in short-term bond ETFs is historically quite low. If the returns record an “upside surprise” as we’ve seen in the past examples noted above, advisors might just be seen as financial Houdini’s in the eyes of their relaxed clients.

Rob Isbitts' Wall Street career spans 5 decades and multiple roles, all dedicated to providing clarity to investors by busting classic myths and providing uncommon perspective. He did so as a fiduciary investment advisor, Chief Investment Officer and fund manager for 27 years before selling his practice in 2020. His efforts now focus exclusively on investment research, education and multimedia. He started ETFYourself and SungardenInvestment to provide straightforward commentary and access to his investment intellectual property for portfolio construction, stocks and ETFs. Originally from New Jersey, Rob and his wife Dana have 3 adult children and have lived in Weston, Florida for more than 25 years. 

Loading