Spiking Short Term Bond ETF Assets May Stick

November 27, 2018

Driven by rising interest rates, 2018 flows into short-term ETFs have been prolific.

Year-to-date, these ETFs have gathered more than $43 billion in assets. This number represents close to 58.4% of the total inflows into fixed-income ETFs for the year.


Niche 1-Month Flows ($M) YTD Flows ($M)
Broad Maturities -343 12,278
Floating Rate 426 10,910
Intermediate 581 6,647
Long-Term -840 1,380
Short-Term 4,979 24,690
Ultra-Short Term 5,214 19,123

Flows into fixed-income ETFs at 11/21/2018; data from FactSet


The yield-curve dynamics have made short-term debt attractive on a relative basis to longer-dated debts. The question now is whether the short-term ETF popularity will stick into 2019.

Short End Of Curve Trade

Short-term rate popularity is mostly due to changes in the yield curve.

During 2018, rates have experienced an upward shift, as displayed in the chart below. Particularly, rates at the front end of the curve (short maturities) have almost doubled, thus giving investors better incentives to park their money in short-term debt.


Treasury Yield Curve; data from the U.S. Department of the Treasury


However, higher short-term rates are not the only benefit for this type of trade; shorter maturity bonds also help mitigate investors’ reinvestment risk and duration risk.

Imagine an investor rolling a bond every three months during the year, and as each rollover date arrives, the interest rate increases. So, why would the investor allocate money into a longer time frame, increasing the uncertainty, if a short-term maturity instrument offers an enticing yield alongside expectations of higher yields in the future?

In the case of a short-duration Treasury ETF, the investor would receive higher dividend payments each month as the fund rolls over its exposure. And because of the short maturity, the price of the ETF would not decrease as much longer-maturity ETFs would.

This can be seen in the total return of the iShares 1-3 Year Treasury Bond ETF (SHY) with a gain of 0.56% so far in 2018, compared to a loss of 7.36% in the iShares 20+ Year Treasury Bond ETF (TLT).

Will Demand Continue?

Three factors would play an important role for the demand for short-term debt ETFs: the Fed, the yield curve and stock market volatility. Let’s look at each.

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