Investors who are seeking cash or money market fund alternatives can utilize ultra-short-duration bond exchange traded funds to park their money.
Bond ETFs come in a range of maturities, providing investors with a way to customize his or her level of rate risk. With short duration bond funds, investors are in the safest end of the rate risk spectrum.
Duration is measure of a bond’s sensitivity to changes in interest rates. A higher duration corresponds with a larger negative impact on bond prices if interest rates rise while a low duration corresponds with a smallerr negative impact on prices if rates rise. Bond prices show an inverse relationship to rates.
Ultra-short-duration bond ETFs have popped up as an alternative to money market funds as Fed leaders push for tighter rules while financial leaders point to increased costs. [Money Market Reform Debate and Short-Duration Bond ETFs]
Specifically, the SEC proposed to abandon the fixed $1 share price and to float the value on “prime” funds held by treasurers and institutional investors.
Large financial firms believes it will cost more than anticipated to meet the necessary compliance, stress testing and daily redemption limits. Any changes in the money markets would support the growing fixed-income ETF market, notably short-duration bond funds as a cash alternative.