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.
iShares Short Maturity Bond ETF (NYSEArca: NEAR)
Assets: $102.6 million
Duration: 0.97 years
Yield: 0.79% 30-day SEC
Comment: BlackRock’s iShares launched this short-term bond ETF in late September. The actively managed fund is comprised of investment grade corporate and government agency debt and emphasizes income generation. The portfolio includes both A-quality and lower investment grade B-rated securities.
SPDR SSgA Ultra Short Term Bond ETF (NYSEArca: ULST)
Assets: $12 million
Duration: 0.23 years
Yield: N/A 30-day SEC
Comment: ULST started trading on October 9. The fund is also actively managed and includes a basket of investment grade A-rated securities from both corporate and government issuers.
PIMCO Enhanced Short Maturity ETF (NYSEArca: MINT)
Assets: $3.9 billion
Duration: 0.77 years
Yield: 0.53% 30-day SEC
Comment: MINT is the largest PIMCO ETF. The fund is also actively managed. The ETF holds a diverse basket of international investment grade debt. The U.S. makes up 51% of the holdings.
Guggenheim Enhanced Short Duration ETF (NYSEArca: GSY)
Assets: $456.7 million
Duration: 0.25 years
Yield: 0.94% 30-day SEC
Comment: The actively managed GSY tries to outperform the Barclays Capital 1-3 Month U.S. Treasury Bill Index.
iShares Short Treasury Bond ETF (NYSEArca: SHV)
Assets: $2.99 billion
Duration: 0.41 years
Yield: 0.05% 30-day SEC
Comment: SHV passively tracks a basket of Treasury bonds with remaining maturities up to one year.
SPDR Barclays 1-3 Month T-Bill ETF (NYSEArca: BIL)
Assets: $1.06 billion
Duration: 0.16 years
Yield: -0.03% 30-day SEC
Comment: BIL passively tracks a basket of 1-3 month Treasury bills. The SEC yield represents the net investment income earned over a 30-day period and reflects interest earned in the period after deducting expenses for the period.
Max Chen contributed to this article.