Now is one of those rare times when taking less risk can actually pay off. And super-safe, short-term bond ETFs are an easy way to cash in.
Ten of the most popular ultrashort bond ETFs, which hold bonds that conservatively mature in months not years, yield an average 4.4%, according to an Investor's Business Daily analysis of data from ETF.com and Morningstar Direct.
That's a staggering opportunity to gain more by risking less pain. Bonds, more broadly, only yield 3.96% and don't mature for more than six years. It outstrips even the 4% paid by many high-yield savings accounts.
"Cash-like bond ETFs are kings and queens in this market," said Todd Rosenbluth, head of research at VettaFi. "Investors are getting paid handsomely to wait out the market volatility and still have liquidity to move back into the equity market or take on more credit risk if and when the environment improves."
Ultrashort ETFs: More Gain, Less Pain From Interest Rates
How do you get these low-risk returns?
Ultrashort ETFs, like SPDR Bloomberg 1-3 Month T-bill ETF even pay out more than the most popular bond ETF: iShares Core U.S. Aggregate Bond ETF. With BIL, you get an SEC yield of 4.48%, despite owning bonds maturing in less than three months. That's higher than the 3.96% yield of AGG, despite its bonds maturing in more than six years.
Why are short-term bonds safer in this market? Interest rates have been rising. If you own a short-term bond ETF, its yield will quickly rise as the Fed hikes further. With long-term bonds, you'd have to wait at least six years before most lower yielding bonds can be replaced in the ETF's portfolio.
Such ultrashort term ETFs are the closest to what investors used to scurry to when looking for risk-free gains: money market mutual funds, says Todd Rosenbluth, head of research at VettaFi. Money market funds were popular in rough markets as they pay high yields and their prices stay fixed to $100.
"There are not money market ETFs that stay at a 100 price but there are many ETFs that offer relatively high yields, while investing in the shortest term Treasury bills and other investment grade bonds," he said.
The ultrashort-term ETFs can also be bought in an existing brokerage account for low fees. This makes them an alternative not only to money market funds, but also to "sweep" accounts where your broker usually stuffs uninvested cash. Sweep accounts usually pay next to nothing.
Looking At Ultra-Short Term Plays With Higher Interest Rates
To understand how ultrashort term bond ETFs can help your portfolio, look at the most popular one, the $29.9 billion-in-assets SPDR Bloomberg 1-3 Month T-bill. Not only does it yield more than many savings accounts and bond funds, it only charges 0.135% annually. That's competitive with the Vanguard Federal Money Market Fund (VMFXX) charging 0.11% for its yield of 4.72%.
And thanks to higher interest rates, the price of BIL is holding up, too. Shares of the ETF are actually up 0.4% this year so far. Other options like JPMorgan Ultrashort Income ETF and iShares Short Treasury Bond ETF are up by tiny amounts this year, too.
The rush is on to grab these yields while they last. Bond funds lured 60% of all ETF flows in the first quarter, says State Street Global Advisors. And ultrashort funds attracted $25 billion in inflows or 60% of the money pouring into government bonds.
"Investor sentiment toward short term investment grade bond ETFs is quite strong," Rosenbluth says.
Big Yields, Low Risk
Most popular ultrashort term bond ETFs
| ETF | Symbol | Assets ($ billions) | SEC yield | Fee |
|---|---|---|---|---|
| SPDR Bloomberg 1-3 Month T-bill | $29.9 | 4.48% | 0.14% | |
| JPMorgan Ultrashort Income | 24.8 | 4.63% | 0.18% | |
| iShares Short Treasury Bond | 23.3 | 4.56% | 0.15% | |
| iShares 0-3 Month Treasury Bond | 10.3 | 4.41% | 0.05% | |
| BlackRock Ultra Short-Term Bond | 6.5 | 4.78% | 0.08% | |
| Goldman Sachs Access Treasury 0-1 Year | 5.8 | 4.52% | 0.12% | |
| Invesco BulletShares 2024 Corporate Bond | 4 | 5.30% | 0.10% | |
| Vanguard Ultra-Short Bond | 3.4 | 4.82% | 0.10% | |
| iShares iBonds Dec 2023 Term Treasury | 2.7 | 2.02% | 0.07% | |
| Goldman Sachs Access Ultra Short Bond | 0.5 | 4.59% | 0.16% |
Sources: IBD, S&P Global Market Intelligence, ETF.com, Morningstar Direct
Follow Matt Krantz on Twitter @mattkrantz
