Under The Microscope: Short-Term Bond Funds

March 09, 2009

Here's a breakdown of short-term bond ETFs now available and how they compare with their peers.

[Editor's Note: The following is an edited excerpt of an article from February's edition of the Exchange-Traded Funds Report. Subscribers can read the full story here.]

As markets continue to slide, many advisers are suggesting that investors play it safe. In the world of fixed income, that means staying on the short side of the duration curve to avoid the threat of rising interest rates.

In the past 18 months, as the world's credit crisis has spread to stocks, a number of options have come to market for exchange-traded fund investors. Those looking for short-term bond ETFs can now find several different portfolios to choose from.

Most of them, however, don't have much more tha a year of trading under their belts. It means there's not a lot of trading history on the funds. Still, we can evaluate those funds to see where frightened investors might best park their cash.

Treasury Bond ETFs

The "granddaddy" of the short-term bond ETFs comes—no surprise—from Barclays Global Investors. The iShares Barclays 1-3 Year Treasury Bond Fund (NYSE Arca: SHY) dates back to July 2002, and had $7.69 billion in assets at the end of 2008. For all intents and purposes, its portfolio consists entirely of Treasury notes. It had more than 40 holdings as of year-end 2008. According to iShares, SHY had an average weighted maturity of 1.82 years.

The fund was the second-best performer in the group in 2008, up 6.61%. It had 3-year and 5-year annualized returns of 4.78% and 3.94%, respectively. SHY charges an annual expense ratio of 0.15%.

Another iShares fund is also a heavy hitter in the group and holds bonds with even shorter maturities. The iShares Barclays Short Treasury Bond Fund (NYSE Arca: SHV) had about $1.57 billion in assets at the end of 2008. Created in early 2007, it was up 2.84% in 2008. It holds 13 different Treasury notes and has a weighted average maturity of just 0.39 years. Its components have durations ranging from just one month to a year.
The fund charges 0.15% in management fees.

The SPDR Barclays Capital 1-3 Month T-Bill ETF (NYSE Arca: BIL) holds bonds with maturities ranging from one to three months. Its average maturity is just 0.14 years. This extremely short-term bond fund has just 10 holdings (all Treasury bills). BIL ended 2008 up 1.53%, with $743 million in assets. The fund charges 0.13%, making it one of the cheapest ETFs in this comparison. If you want safe, you've got it with BIL.




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