Ultra-short-term bond exchange traded funds are bleeding assets as short-term yields rise in anticipation of the Federal Reserve’s eventual interest rate hike.
For instance, the actively managed First Trust Enhanced Short Maturity Fund (NasdaqGM: FTSM), which launched in early August, attracted over $1 billion in new assets over November, burgeoning to about $1.6 billion in assets under management as of the end of November. However, so far this month, FTSM has lost more than half of its AUM and now holds only $768.3 million in assets. [Active ETF Segment Keeps Growing, Attracting Assets]
The First Trust Short-Maturity Fund tracks short-duration, investment-grade, U.S. dollar-denominated securities. The ETF has a 0.2 year effective duration and a 0.38% 30-day SEC yield.
Additionally, the passive index-based iShares Short Treasury Bond ETF (NYSE: SHV) attracted $1.3 billion over November, according to ETF.com data. However, investors pulled $496.1 million from SHV so far this month.
The iShares Short Treasury Bond ETF tracks U.S. Treasury Bonds that mature less than 1 year. SHV has a 0.44 year duration and a 0.12% 30-day SEC yield.
Many investors have turned to ultra-short-duration bond ETFs earlier this to hedge against rising rates. Additionally, others are using the ETFs as a money market or cash alternative. However, short-duration bond yields are rising as market observers anticipate the Fed is moving closer to raising interest rates next year.
Consequently, funds that hold short-term, high-quality debt are taking a hit as short-term Treasury yields have jumped since mid-October, reports Michael Aneiro for Barron’s. Bond prices and yields have an inverse relationship, so a rising yield corresponds with falling prices.
Bank of America Merrill Lynch also points to increasingly negative daily fund flows from short-term funds since last month.
“We are seeing the first signs that short duration (<5-year) high grade fund flows are reacting to the spike in short term interest rates,” BofA credit strategist Hans Mikkelsen said in the Barron’s article. “Thus since November we have seen outflows on nearly two-thirds of business days (16 of 25), and [Wednesday]’s daily outflow was $429mn – the second biggest over the past two years…. We have argued that short duration is the most crowded trade in high grade, and with short term interest rates increasing as we move toward the Fed’s rate hiking cycle, front end credit spreads are at risk due to the technical of outflows.”
Over the past month, FTSM has dipped 0.09% while SHV was down 0.02%.
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.