Recent commentary from the Federal Reserve indicates the central bank may not boost interest rates this year. In fact, bets are rising that the Fed may even lower interest rates late this year, confirming investors’ bias toward longer-dated bonds and the related exchange traded funds in 2019.

Still, short-term U.S. government debt can play an important role in diversifying portfolios. ETFs such as the Schwab Short-Term U.S. Treasury ETF (NYSEArca: SCHO) can help investors boost fixed income exposure, generate income and smooth out some of the volatility that comes along with sizable equity positions.

Additionally, SCHO is a cost-effective bond fund with an annual expense ratio of just 0.06%, or $6 on a $10,000 investment. Schwab clients can realize additional cost savings by trading the ETF on the firm’s commission-free OneSource platform.

SCHO follows the Bloomberg Barclays US Treasury 1-3 Year Index, meanings its 85 holdings have maturities ranging from one to three years.

“Indexing Treasuries in this way is a sound approach for exposure to a specific portion of the yield curve,” said Morningstar in a recent note. “It is difficult for active managers to recoup their fees while offering comparable exposure to Treasuries on this narrow segment of the yield curve, as Treasuries are one of the most competitively priced areas of the bond market and managers have little leeway to take additional duration risk.”

Sinking Into SCHO ETF

SCHO’s weighted average maturity is 1.99 years and its effective duration is 1.93 years, according to issuer data.

“This portfolio has low interest-rate risk, but it tends to offer lower return potential than funds that invest in longer-maturity bonds,” according to Morningstar. “The shape of the yield curve can influence the attractiveness of this trade-off. When the slope of the curve is gentle, the opportunity cost of investing in short-term Treasuries is low.”

SCHO’s rate risk compares favorably with the category average.

“This ETF takes less interest-rate risk than the short government Morningstar Category average. Its volatility hovered near the bottom third of the category between August 2010 and February 2019. But its returns were mediocre over this stretch. Its low fee ranks among the cheapest in the category and should provide it with a durable edge over its more expensive peers,” according to Morningstar.

The research firm has a Silver rating on SCHO.

For more information on U.S. government debt, visit our Treasury Bonds category.

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