Not All Short-Duration ETFs Created Equal
SHV, BIL, MINT and NEAR are by no means the only ETFs in the ultra-short-term bond space. There are a number of funds that provide low-duration exposure. Some exclusively hold Treasuries; others take on riskier debt. Some limit their maturities to one year or less; others hold longer maturities.
Generally, fixed-income instruments with maturities of less than five years are considered short term, while instruments with maturities of less than one year are considered ultra-short term.
Wading away from Treasuries may boost yields but adding credit risk. Taking on longer maturities may add yield at the expense of greater interest rate risk.
“Not all short duration ETFs are created equal. They all have their own risk and return profiles,” said Kelly Ye, director of research for IndexIQ. “The majority of the short-duration ETFs are composed of short maturity bonds, which still have some interest rate risk. Floating-rate ETFs can benefit from a rising rate environment, but they’re subjected to liquidity, credit and call risk. Interest-rate-hedged products could subject investors to curve risk.”
According to Ye, there is no “one size fits all” ETF for investors.
“Short-duration Treasury ETFs are good for investors looking for cash equivalent and value safety above all,” she added, “while short-duration corporate bond/bank loan ETFs are for investors willing to take credit risk to pick up incremental yield.”
Things To Consider
Jordan Farris, managing director of ETF product development for Nuveen, recommends investors consider funds that offer an attractive yield—something that will generally outpace inflation—and minimizes interest rate risk while still achieving income objectives.
Meanwhile, CLS’ Jenkins advises that investors have a clear vision of what they want out of their allocation to short-term bonds.
“Some decision points to help narrow the available options include active versus passive, fixed versus floating, one year or less versus one- to three-year maturity, and government versus spread sector, he explained. “These decisions will impact expected risk and return. Other factors to analyze include cost, liquidity, portfolio construction, tracking error (for passive ETFs), and manager process and philosophy (for active ETFs).”
Most Popular Short-Term Bond ETFs Of 2018
Data measures the year-to-date period through May 24, 2018.