If you have a bond portfolio that’s heavy with long-term bonds, you can potentially reduce your interest rate risk by rebalancing your portfolio to increase exposure to short-term bond ETFs. The iShares Short Maturity Bond ETF(NEAR) seeks to maximize income through diversified exposure to short-term bonds. With one fund, you can potentially add diversification while seeking to reduce your interest rate risk at the same time. You don’t have to shift your entire bond portfolio to shorter-term bonds; just enough to balance the rest of your long-term bond portfolio.
Or, maybe you’re sitting on cash. You know that every day spent sitting on cash is a day that your money is not working for you, but you’re stuck. Maybe you feel a little bit like Goldilocks: you’re equally nervous about the bond market (too risky to buy long term bonds now, if they’re about to lose money!) and the stock market (too volatile). For you, short-term bond ETFs may be just right. Put your cash back to work with something like the iShares Floating Rate Bond ETF (FLOT), which offers access to 300+ investment-grade floating rate short-term bonds in a single package. Floating rate note coupons are designed to rise with short-term interest rates, which can help you keep up when short-term rates rise.
Regardless if you’re starting out with long-term bonds, or no bonds at all, toe dipping into short-term bonds can help you stay invested in the bond market—no matter where interest rates go.
Jessie Szymanski writes about personal finance for The Blog. You can find more of her posts here.