The Federal Reserve gave financial markets an early holiday treat, so to speak, by making official plans to begin tapering its quantitative easing program in January.
The Fed will trim its $85 billion-per-month in bond buying to $75 billion with reductions coming in equal parts from Treasuries and mortgage-backed securities. Due to months of intense speculation regarding the arrival of tapering, investors pulled $22 billion from long-duration bond ETFs in the first 11 months of the year while plowing $22 billion into short-duration fare. [Data Reveal Second-Half ETF Sentiment]
While investors have been focusing on the shorter end of the fixed-income ETF market for months, we think there are a number of appealing products that have modest expense ratios, minimal interest-rate sensitivity (duration) and other favorable characteristics,” said S&P Capital IQ in a recent research note.
S&P Capital IQ notes that there are over 42 ETFs on the market today with an average duration of less than three years. Some of those funds are international plays or loaded with high-yield, meaning increased global and/or credit risk for investors that do not look under the hood. [Junk Bond ETFs Rises as Defaults Decline]
Just 23 of those 42 ETFs carry Overweight ratings from S&P Capital IQ, according to the research firm. Among that group of 23 is the Vanguard Short-Term Bond ETF (NYSEArca: BSV), which is also among the top-10 asset-gathering ETFs in 2013, bringing its AUM total to north of $11 billion. BSV has a 30-day SEC yield below 1%, but the fund is inexpensive with annual fees of just 0.1%. [Short-Duration Bond ETF Sees Inflows Surge]
BSV competes directly with the $11.7 billion iShares 1-3 Year Credit Bond ETF (NYSEArca: CSJ), which S&P Capital IQ also rates overweight. CSJ has a 30-day SEC yield of 0.67% and annual fees of 0.2%, but the fund is effective in helping investors skirt interest rate risk with an effective duration of just 1.88 years, according to iShares data.
The $2.9 billion SPDR Barclays Short Term Corporate Bond ETF (NYSEArca: SCPB) also earned an overweight rating from S&P Capital IQ. SCPB is also inexpensive with an annual expense ratio of just 0.1245% and the ETF has a modified adjusted duration of just 1.89 years. About 63% of SCPB’s 871 holdings are rated AA or A.
The S&P Capital IQ list of top-ranked fixed-income ETFs with duration of less than three years also includes ETFs from Guggenheim, PIMCO and Schwab, as well as others from iShares, State Street and Vanguard, said the firm in the note.
SPDR Barclays Short Term Corporate Bond ETF