Short-term bonds are generally defined as debt with maturities of one to three years. Additionally, these bonds come in a variety of forms, including Treasuries.
As such, there are dozens of exchange traded funds addressing this corner of the bond market, including the BondBloxx Bloomberg Two Year Target Duration US Treasury ETF (XTWO). XTWO follows an index comprised of U.S. government debt with an average duration of about two years.
Owing to its status as a Treasury ETF, XTWO features low credit risk. And because its duration hovers around two years, the fund isn’t highly sensitive to changes in interest rates. However, neither point implies reduced levels of income as highlighted by XTWO’s 30-day SEC yield of 4.20%. That’s impressive when considering credit and rate risks are relatively benign with this ETF.
What Investors Get with XTWO
With XTWO, investors get a low-cost income generator with minimal risk. Alluring traits to be sure, but not ones that will make an investor rich. It’s important to understand that before embracing ETFs of this nature.
“Thanks to their short maturities, though, their losses are more muted than those of longer-term instruments. Credit risk — that is, the risk that a company won’t be able to repay its debt — can also be an issue for corporate bonds,” noted Morningstar analyst Amy Arnott. “In practice, this means that short-term bonds have generated relatively low returns — but they also court less volatility than any other asset class except cash.”
While XTWO might not be in store for glamorous returns, the time could be appropriate to consider the fund not only because of its tidy income but also because history confirmed short-term bonds are usually at their best when interest rates and inflation are declining.
“Because of their limited maturities, though, they don’t benefit as much from downward trends in interest rates. As a result, most short-term bond categories had relatively anemic returns over the 10 years through 2021 but held up better than longer-duration categories amid the bond market carnage in 2022,” added Arnott.
Another advantage with XTWO is that investors, should the current market setting oblige, reap benefits from the fund without needing to hold an individual bond to maturity, which is usually the best option with a single short-term Treasury. That means XTWO investors can potentially take profits and move into appealing investments more swiftly than holders of single bonds.
For more news, information, and analysis, visit the US Treasuries & TIPS Fixed Income Channel.