Sorting Through Short-Duration Bond ETFs

Last year’s jump in 10-year Treasury yields spooked investors out of longer-dated bond exchange traded funds with the residual effect being substantial inflows to short-duration funds this year.

“It is of little surprise to see that among the most popular products in February are ETFs with bonds maturing in one to three years. There are also a number of new alternatives for investors concerned about rising interest rates,” said S&P Capital IQ in a new research note.

Three of the top 10 ETFs in terms of year-to-date inflows, including the top two, are funds holding bonds with maturities of seven years of less. The iShares 1-3 Year Credit Bond ETF (NYSEArca: CSJ) is one of those funds.  CSJ, which S&P Capital IQ rates overweight, has brought in almost $1.3 billion this year, bringing its assets under management total to $13.2 billion. [Don’t Fear the Fed With These Bond ETFs]

CSJ’s 30-day SEC yield is just 0.61%, but it passes muster as a short-duration fund with an effective duration of 1.89 years. Credit quality is also high as over 62% of CSJ 915 holdings are rated between A- and AAA, according to iShares data.

S&P Capital IQ also has an overweight rating on the iShares 0-5 Year Investment Grade Corporate Bond ETF (NYSEArca: SLQD). SLQD debuted in mid-October 2013 as short-duration answer to the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD). On that metric, SQLD does its advertised job with an effective duration of 2.42 years, more than five years below that of LQD.

SLQD “ranks favorably under our S&P Capital IQ methodology for its low 0.15% expense ratio and modest duration of 2.4 years. Naturally, the 30-day SEC yield for SLQD is lower too, at 1.1%. SLQD’s holdings are largely bonds rated A from rating agencies that operate independently from S&P Capital IQ. Bonds issued by Financials such as Citigroup and JP Morgan Chase make up a significant portion of the portfolio. And despite limited volume, the bid/ask spread is just $0.05, which is lower than most bond ETFs with under $50 million in assets,” according to the research firm. [iShares Debuts Short-Duration Corporate Bond ETFs]