ETF Spotlight: Will SGOV Surge After Latest Inflation Data?
Yields on short-term U.S. Treasuries are outpacing inflation.
Could an unexpected uptick in Thursday's inflation data nudge investors toward BlackRock's iShares 0-3 Month Treasury Bond ETF (SGOV)?
SGOV, a $26 billion by assets fund that focuses on short-term Treasuries, traded roughly flat after the September Consumer Price Index showed prices rising 0.1% more than expected to 2.4% annually. That close was consistent with the ETF's performance year-to-date.
"Yields had already risen to price in a resilient labor market and the bond market was not 'surprised' by the slightly hotter-than-expected CPI," said etf.com Research Lead Kent Thune.
But the CPI also offered evidence that inflation, many investors' primary economic concern for more than two years, might remain sticky enough to sway the U.S. central bank into continuing its recent monetary dovishness at a more moderate pace than some analysts expected.
The Federal Reserve slashed interest rates by 50 basis points (bps) last month, its first cut since early 2020, with some indications suggesting it would lower the rate by the same amount in November at its next Federal Open Market Committee meeting. The latest CME FedWatch tool now shows a nearly 78% likelihood of a lesser 25 bps reduction. The Fed is aiming to sink inflation to 2% annually.
SGOV's Low Downside Risk
SGOV, which debuted in May 2020 and carries a 0.9% expense ratio, offers vanilla exposure to ultra-short-maturing fixed income securities on the U.S. Treasury market. The fund tracks the Intercontinental Exchange Inc.'s (ICE) 0-3 month Treasury Securities Index, selecting and weighing its components by market value and rebalancing them each month. It has generated about $350 million in net inflows over the past five days and roughly $8.5 billion so far in 2024.
Thune noted that "the ultra-short duration" of the fund's holdings "translates to very little downside price risk while earning a yield that outpaces the current rate of inflation."
"This makes SGOV a kind of 'have your cake and eat it too' fund for investors expecting a higher-for-longer rate environment," he said.
