In the rush to move out on the yield curve ahead of potential rate cuts next month, investors shouldn’t overlook opportunities in ultra-short duration. Funds like the recently launched KraneShares Sustainable Ultra Short Duration Index ETF (KCSH) offer diversification as well as duration and currency risk mitigation that may benefit an overall bond portfolio.
The rapid unwind of the Japanese yen carry trade continues to reverberate through global markets. With the potential for the U.S. central bank beginning interest rate cuts next month, investors have much to contend with when investing in foreign currencies.
The potential for imminent interest rate cuts leaves bonds attractively positioned as bond yields decline and prices rise. Investors continue flocking into longer duration securities, seeking to lock in elevated yields. However, overlooking ultra-short-duration bonds when investing means a number of potential missed portfolio benefits.
KCSH seeks to track the Solactive ISS Sustainable Select 0-1 Year USD Corporate IG Index. The index measures the performance of investment-grade corporate bonds with maturities up to one year. This offers very low duration risk for investors.
The bonds are U.S. dollar denominated, reducing currency risk for portfolios during a volatile time for foreign currencies. The strategy also seeks to offer similar credit and interest rate risk as ultra-short-duration, IG bond benchmarks.
Data sourced from KraneShares, Solactive, and Bloomberg as of 06/30/24.
Image source: KraneShares
The fund’s focus on ultra-short-duration bonds makes it a strong alternative to money market funds, particularly as rates decline. It also provides low correlation to traditional bonds, making it an attractive diversifier for longer-duration bond allocations.
KCSH’s strategy screens for those issuers that align with the Paris Agreement. This entails curtailing global emissions to 1.5° Celsius by 2050. Issuers must demonstrate self-decarbonization of 7% or greater each year before their inclusion in the portfolio. The strategy also excludes issuers whose revenues are derived from fossil fuels, as well as other screens.
The fund’s focus on sustainability creates a diversified portfolio of issuer sector weights compared to peers within the space. This makes it a complement to other short duration funds within a portfolio, and a strong addition to an income sleeve.
Top holdings within the fund include Autozone, VF Corporation (whose brands include Vans, The North Face, Jansport, and more), and Verisign Inc. as of 8/20/24. The latter provides internet infrastructure and domain name registry services.
KCSH has an operating expense of 0.20% with fee waivers that end Aug. 1, 2025.
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