Short-Term Bond ETFs: Cool Kids at the Fixed Income Party

Although U.S. stocks are soaring to record highs, fixed income exchange traded funds are the apples of investors’ eyes.

Data confirm as much. Last month, bond ETFs hauled in a record $17.7 billion in new assets even as the S&P 500 jumped more than 3%. That easily topped the previous monthly inflows record of $17 billion, set in February for bond ETFs. [Bond ETFs Dominate October Flows]

That trend remains in place as investors, anticipating that the Federal Reserve will boost interest rates sometime next year, are gobbling up ultra-low duration funds.

“Inflows into ultra-short exchange-traded bond funds, which typically invest in Treasury bills, short-term corporate securities and other debt, have risen this quarter by $4 billion, or 35 percent, to $15.9 billion. That is more than double the inflows into long-term bonds, which have seen growth of $1.4 billion since the start of October, to $18.4 billion,” reports Cordell Eddings for Bloomberg.

Of the top-10 ETFs in terms of new assets added in the fourth quarter, five are bond funds and of those five, three fit the bill as low or ultra-low duration offerings. With an effective duration of just 0.46 years, the iShares Short Treasury Bond ETF (NYSE: SHV) has added nearly $3.5 billion in new assets this quarter. That is nearly $1 billion more than the Vanguard S&P 500 ETF (NYSEArca: VOO).

The iShares Barclays 1-3 Year Treasury Bond Fund (NYSEArca: SHY) has added over $2 billion in new assets during the current quarter, outpacing the inflows to all but five ETFs. [Room for Growth for Bond ETFs]

Investors are also embracing shorter duration high-yield options. The SPDR Barclays Short Term High Yield Bond ETF (NSYEArca: SJNK), which has a 30-day SEC yield of 5.13% and a modified adjusted duration of 2.3 years, has added nearly $414 million this quarter.