A strong economy has been keeping interest rate cuts in check. But as the Federal Reserve mulls what to do next with interest rate policy, it’s an ideal time to get exposure to ultra-short bond funds.
In the meantime, the Fed finds itself diverging from its initial rate-cutting path before the start of 2025. Persistently high inflation has given the Fed enough hesitance when it comes to rate cuts. Until it receives the data to do so, it could stand pat until the summer.
“Fed policymakers themselves have said they are looking for more evidence that inflation is heading back down to their 2% goal before they feel comfortable cutting rates,” reported Reuters.
For yield seekers, it’s an opportune time to park cash in an ultra-short bond fund that offers competitive rates versus more traditional money market accounts. One ideal option is the KraneShares Sustainable Ultra Short Duration Index ETF (KCSH).
The fund seeks to track the Solactive ISS Sustainable Select 0-1 Year USD Corporate IG Index. That index measures the performance of investment-grade corporate bonds with maturities up to one year. Adding the investment-grade component will help appease more risk-averse fixed income investors who might be antsy about getting corporate bond exposure. While, overall, corporate bonds pose more risk versus government bonds like Treasury notes, the improved fundamentals have made the environment for corporate bonds much more inviting to the risk-averse.
“Corporate fundamentals remain generally strong for both high-yield and investment-grade corporate bonds, but dispersion has widened across sectors and credit ratings,” noted AllianceBernstein in a credit outlook report.
Yield With Sustainability
As of February 25, KCSH has a 30-day SEC yield of 4.36%. While that can appease yield seekers, KCSH investors are likely adding exposure because of its sustainability component.
The ETF screens for bond issues that align with the Paris Agreement. It includes climate analysis by Institutional Shareholder Services in its security selection screen for added discernment.
All in all, bond holdings include those of companies that must reach a goal of curtailing global emissions to 1.5 degrees Celsius by 2050. In addition, issuers must demonstrate self-decarbonization of 7% or greater each year prior to inclusion in the ETF’s portfolio. Under the hood of KCSH, investors won’t find companies that derive their revenue from fossil fuels or are in violation of other conscious investing screens as determined by the index provider.
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