Ultrashort bond funds are experiencing highs and lows this year.
Why it matters: They racked up a record $24 billion monthly inflow in March, but their fortunes reversed in April. Investors yanked out $1.6 billion. It was the biggest monthly outflow for the category in about two years. Ultrashort bond funds and similar fixed-income investments attract investors seeking a safe haven. They also generate cash and help moderate portfolio risks. Why are investors leaving now? What should you know before adding them to your portfolio?
Morningstar’s ETFInvestor newsletter editor Dan Sotiroff answers that, and the associate director of US passive strategies research will also reveal which shorter-term bond exchange-traded funds have high ratings from Morningstar.
10 Questions on Shorter-Term Bond ETFs
- There are three types of shorter-term bonds: ultrashort, short-term, and short-term government. Can you explain how they work, what they invest in, and how long?
- Are there any differences when it comes to passive and active ETFs?
- How do these bond ETFs compare with other shorter-term investments like money market funds and certificates of deposit?
- What’s been the performance of short-term bond ETFs in the past 12 months before their historic inflows in March?
- Investors poured into the funds in the early weeks of the war in Iran, but they withdrew their money weeks later. Why do you think they reversed course?
- Income investors are drawn to these funds, but who else could these be suited for?
- What are some caveats about investing in shorter-term bond ETFs compared with intermediate-term or long-term bond ETFs?
- Which ultrashort and short-term bond ETFs do Morningstar analysts consider top picks?
- Which short-term government bond ETFs earn Silver or Gold Morningstar Medalist Ratings?
- What’s the takeaway for income investors considering shorter-term bond ETFs?
Key Quote on the Yield of Shorter-Term Bond ETFs
Their yield is going to be a very good predictor of how they perform in the future. Whatever yields you have today, that’s probably what you’re going to get over the next few months to a year in a lot of these types of funds. Right now, that’s probably in the 3.5% to 4% sort of range, again, depending on the specifics of the ETF you’re looking at. That’s kind of how I size up performance in a lot of these.
Dan Sotiroff, associate director of US passive strategies research, Morningstar
The Takeaway: Shorter-term bond ETFs are low-risk, low-reward funds, according to Sotiroff. They can be used like a savings account to park money for short-term spending needs like home maintenance or vacations. Sotiroff says the ETFs’ total return will not be great, but the funds are good to help manage portfolio risk or gain access to a stable and predictable yield.
More From Morningstar on Shorter-Term Bond ETFs and Fixed-Income Investing
Active managers tend to experience more success in a lot of shorter-bond ETF categories because they can push beyond the boundaries. Sotiroff says some managers in the ultrashort category may take on more duration risk or interest rate sensitivity to boost their yield and total return. He calls that a fair game. However, passive investments in the ultrashort category generally stick with the average maturity of zero to one year.
In this Investing Insights clip, Sotiroff explains why Vanguard is betting big on active fixed income.
Watch this episode of the podcast that examines how Big Tech’s bond spree and rising US debt are creating risks and opportunities.
Morningstar’s Amy Arnott writes about how bonds can still offer diversification benefits during times of higher inflation.
Be sure to check out Morningstar’s Guide to Fixed-Income Investing.
Securities Mentioned in This Episode
Fidelity Limited Term Bond ETF FLTB
JPMorgan Limited Duration Bond ETF JPLD
iShares 1-5 Year Investment Grade Corporate Bond ETF IGSB
Pimco Enhanced Short Maturity Active ETF MINT
iShares 0-3 Month Treasury Bond ETF SGOV
Vanguard 0-3 Month Treasury Bill ETF VBIL
Vanguard Short-Term Treasury ETF VGSH
Schwab Short-Term U.S. Treasury ETF SCHO