It's an Opportune Time to Capitalize on This Short-Duration ETF

With the U.S. Federal Reserve effectively pausing interest rate hikes in June, it’s an opportune time to take advantage of current yields with a short-duration exchange traded fund (ETF) such as the American Century Short Duration Strategic Income ETF (SDSI).

A short-duration or even ultra-short strategy has been in favor during the past couple of years to mitigate rate risk and allow investors flexibility in a rising rate environment. With the capital markets anticipating the Fed to decelerate its pace of rate hikes, it’s an opportune time to take advantage of short-duration fixed income.

“Our view is that we saw the peak in front-end interest rates — two-year to five-year yields — in early March of this year, and that the Fed will be biased to stay on the sidelines as the labor market remains resilient and inflation, although also having peaked, will be slow to decline to the Fed’s target levels,” said Scott Pavlak, head of short-duration fixed income at MetLife Investment Management, in a Pensions & Investments article highlighting the opportune environment for short duration. “From our perspective, even with a lower fed funds rate in 2024 and 2025, interest rates at the front end will remain higher than where they have been over the last decade. Putting all of it together means that, in our view, investors should continue to earn attractive returns from their short-duration portfolios, despite potentially elevated interest rate and spread volatility.”

An Active and Cost-Effective Short-Duration ETF Option

With an expense ratio of 0.32%, SDSI seeks income and, as a secondary objective, long-term capital appreciation. The strategy will seek to generate attractive yield by investing across multiple fixed income market segments, which maintain a short-duration focus — true to form to its fund description, 65% of its holdings fall within a zero- to two-year duration.

The majority of the fund invests in investment-grade debt, so a focus on quality is apparent in its holdings. Debt holdings may include corporate bonds and notes, government securities, and securities backed by mortgages or other assets.

The active management allows fund managers to maintain pliability in the current fixed income environment, allowing for changes to holdings on the fly if market conditions warrant an adjustment. As of May 31, the 30-day unsubsidized yield is 5.08% with a 4.87% 12-month distribution rate.

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