As many fixed income investors already know, yields on U.S. government debt are anemic and the shorter duration investors take on, the lower those yields. For investors looking for cash alternatives, the SPDR SSgA Ultra Short Term Bond ETF (NYSEArca: ULST) is an idea to consider.
As a way to diminish risk exposure in an environment of heightened volatility, investors can look to cash alternatives like ultra-low duration bond ETFs to wait out further market oscillations. The $298.15 million ULST follows the Bloomberg Barclays US Treasury Bellwether 3 Month Index.
Investors who are seeking cash substitutes may look to actively managed, ultra-short duration bond ETFs that are freer to adapt holdings in a shifting market environment and generate a decent yield along the way.
“It’s important to clarify the definition of “cash,’” said State Street portfolio strategist Will Goldthwait in a recent note. “Cash includes strategies such as BIL, which are typically not negatively impacted by volatility in risk assets. Ultra-short term bond strategies, such as the SPDR SSGA Ultra Short Term Bond Fund ETF (ULST), can help to supplement cash positions and can be used to increase the yield of a cash allocation. Such strategies should be considered an intermediate holding that can be invested for up to 6 to 12 months.”
Understanding ULST
ULST has 170 holdings, an option-adjusted duration of just 0.38 years, and a current yield of 1.64%, according to issuer data. That yield advantage relative to one to three-month T-bills is meaningful.
“Since 2016, this yield advantage has averaged approximately 0.50%. Over time, investors should expect that the yield differential is likely to revert to its historical average as credit spreads benefit from the Fed’s various liquidity programs and credit conditions continue to improve,” according to Goldthwait.
Over the long haul, ULST’s diversified, multi-asset strategy could prove beneficial for prudent income investors.
“Careful consideration should be given when choosing an ultra-short strategy. ULST uses a multi-asset, highly diversified approach to purchasing credits to provide an optimal risk-return profile. Over time, this strategy can prove effective in mitigating interest rate risk and may provide greater income compared to a cash holding,” notes Goldthwait.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.