Yes, we’re on track for rate cuts this year – the Fed has admitted as much. However, it’s the “when” that matters here, with Fed Chair Jerome Powell recently reminding markets that the bank will need to see evidence of inflation cooling further before cuts can occur. Until then, ultra short-term bonds remain intriguing, especially via an active ETF.
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TBUX, the T. Rowe Price Ultra Short-Term Bond ETF, could be the right way to approach that opportunity. TBUX charges a low fee for an active ETF at only 17 basis points (bps). In doing so, it looks for investment-grade fixed income securities with an effective duration of 1.5 years or less. It seems to offer a high level of income via mortgage-backed securities, muni bonds, money markets, and other opportunities while overweighting shorter-duration offerings.
An Active Approach to Ultra Short-Term Bonds
It’s that active approach that could provide a particularly beneficial spin on the ultra short-term bonds. Whereas a passive, indexed ETF would have to stick to the rules and requirements of its index, active ETFs can be more flexible. Indeed, active funds that invest in this space can respond to Fed signals or more closely scrutinize a given security. It’s that flexibility that can help TBUX outperform passive rivals or adapt to volatility that passives may just have to bear.
TBUX has done well with that approach, returning 6.2% over the last one-year period per VettaFi data. That total has helped it outperform its ETF Database Category and Factset Segment averages. With the ultra short-term bonds ETF set to hit its three-year mark this Fall, the strategy could be a solid option in the waiting period before the Fed raises rates and diminishes potential short-term fixed income returns.
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