As investors plan for retirement, income generated from stocks and fixed-income positions will be used to cover short-term living expenses, or the revenue can be stashed away in a cash equivalent, such as ultra-short-term bond exchange traded funds.
In an aggressive ETF portfolio for couples with a 25-year or longer time frame until retirement, the cash component can make up about 8% of the total investment portfolio, according to Morningstar’s Christine Benz. These funds should be used to help meet daily expenditures over the near-term, or one to two years.
Instead of parking cash in a certificates of deposit account or money market accounts and funds, investors can take a look at ultra-short-duration bond ETFs. [Sorting Through Short-Duration Bond ETFs]
For example, the SPDR Barclays 1-3 Month T-Bill ETF(NYSEArca: BIL) provides access to 1-3 month U.S. Treasury bills. Consequently, the fund has a duration of 0.13 years – a 1% increase in interest rates would translate to about a 0.13% decline in the ETF’s price. BIL has a 0.1345% expense ratio and a -0.07% 30-day SEC yield. The fund is unchanged so far this year.
Alternatively, the SPDR SSgA Ultra Short Term Bond ETF (NYSEArca: ULST) tracks a group of investment grade debt, including corporate bonds – corporate industrials is 38.6% of the fund, corporate finance is 32.7%, asset-backed securities are 25%, Treasuries are 1.5%, non-corporates are 1.5%. ULST has a slightly higher 0.21 year duration and a 0.35% 30-day SEC yield. The fund comes with a more expensive 0.20% expense ratio. The ETF is up 0.3% year-to-date.
Additionally, investors who are comfortable with more risk can consider actively managed bond ETFs, such as the PIMCO Enhanced Short Maturity ETF (NYSEArca: MINT) and the Guggenheim Enhanced Short Duration Bond (NYSEArca: GSY).