Short-Term Muni ETFs to Diminish Rate Risk | ETF Trends

Municipal bond investors who are worried about the negative effects of a Federal Reserve interest rate hike could switch into short-term munis exchange traded funds to mitigate the risks.

“Sticking to intermediate and short-term funds of all flavors is generally a good idea,” Scott Brewster, president of Brewster Financial Planning, said in a Wall Street Journal article. “I would get out of anything extremely long-term, because you’re just an interest-rate spike away from heartache.”

Short-term bond funds are typically less sensitive to changes in interest rates. For instance, the largest short-term munis ETF, SPDR Nuveen Barclays Short Term Municipal Bond ETF (NYSEArca: SHM), has a 0.8% 30-day yield and a 2.84 year duration – a 1% rise in interest rates would only translate to about a 2.84% dip the ETF’s price. [Investors Still Favoring Muni Bond ETFs]

There are a number of other short-term muni bond ETFs to choose from. The Market Vectors-Short Municipal ETF (NYSEArca: SMB) has 1.08% 30-day SEC yield and a 2.97 year duration. The iShares Short Term National AMT-Free Muni Bond ETF (NYSEArca: SUB), has a 0.5% 30-day SEC yield and a 1.99 year duration. The PIMCO Short Term Municipal Bond ETF (NYSEArca: SMMU) has a 0.59% 30-day SEC yield and a 2.13 year effective duration. Lastly, the iShares Short Maturity Municipal Bond ETF (BATS: MEAR) has a 0.67% 30-day SEC yield and a 1.39 year duration.

Market observers argue that fixed-income investors may also find opportunities in short-term munis after interest rates rise.