Investors shifted assets in fixed-income portfolios in response to the rising rate environment, shifting into short-duration bond exchange traded funds. Now on the lowest end of the spectrum, investors have more ultra-short-duration options.
“We are seeing tremendous flows year to date in short and ultra short term bonds, as investors are increasingly anticipating rising interest rates.” James Ross, senior managing director and global head of SPDR ETFs at SSgA, said in a note.
According to Morningstar data, investors added $17 billion in short-term funds while redeeming $49 billion from intermediate-term funds over the first eight months of the year, reports Stan Luxenberg for WealthManagement.
Bond prices and yields have an inverse relationship. As rates rise, bond prices take a hit. Over the first eight months of the year, investors who made the shift were rewarded, with intermediate funds declining 2.7%, whereas short-term funds only dipped 0.4%.
Investors have been pushing up rates as speculators tried to time the Fed’s eventual change to its accommodative monetary policies.
Bond Guru Bill Gross has also advised investors to shift over to lower-maturity bonds. For instance, in his flagship PIMCO Total Return Fund, Gross cut the duration of holdings to 4.42 years from 5.06 years as of Sept. 30, reports Wes Goodman for Bloomberg. Duration is a measure of a bond fund’s sensitivity to changes in interest rates, and a higher duration corresponds to a greater negative effect if rates do rise. [Here’s How The Bill Gross ETF Shapes Up]