With inflationary pressures looming as 2021 turns into 2022, fixed income investors will want to shorten up duration with the Invesco Ultra Short Duration ETF (GSY).
Fundamentally, inflationary pressures can eat away at bond-focused income. Additionally, the Federal Reserve’s move to raise rates in 2022 could allow bond investors to miss out on higher yields.
As such, a way to counter this is to get short-duration exposure.
“The most common response to rising inflation is shortening duration—or how much a bond’s price changes based on interest rates,” a Dividend.com article explains. “For example, a bond with a 5-year duration could lose 5% of its value for every 1% increase in interest rates. The catch is that a shorter duration translates to lower yields, meaning less income for retirees.”
GSY can be added to a portfolio and kept for the duration of the period of inflation, thanks to an ETF’s dynamic trading ability. With the ease of getting in and out of positions like a share of stock, GSY can be held for as long as the investor wishes without wondering whether to hold it until a redemption date like a traditional bond.
It uses a low-duration strategy to seek to outperform the ICE BofA US Treasury Bill Index in addition to providing returns in excess of those available in U.S. Treasury bills, government repurchase agreements, and money market funds, while also seeking to provide preservation of capital and daily liquidity.
Actively Managed for Dynamic Exposure
With its active management component, fixed income investors essentially get a set-it-and-forget-it fund. GSY also focuses on debt issues that don’t exceed one year, making it an ideal option for minimizing interest rate risk in the short term.
“This active ETF looks to achieve maximum current income while preserving capital and maintaining daily liquidity,” an ETF Database analysis suggests. “As a result, the fund should be considered an ultra-safe place to park assets in times of great turmoil.”
“Just don’t expect the fund to pay out a very high yield as the product only seeks to beat the 1-3 month Treasury Bill Index and maintains securities that have a duration of less than one year,” the analysis notes further. “The fund invests in both U.S. treasuries, corporate debt and even up to ten percent in high yield bonds. This added bond holding could help the fund boost yield and since it is such short term the product could see very little in terms of defaults.”
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