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4 Ultra-Short Bond ETFs to Hedge Against Rising Rates

Sweta Killa
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Inflation, which has been mysteriously low for years, has accelerated in recent months, with expectations hovering near the highest level since 2014. This is especially thanks to a rise in energy prices, increase in raw material costs, and a historically low unemployment rate, which suggests that wages could finally pick up.

Growing inflationary expectations are pushing bond yields higher. The yields on 10-year Treasury notes jumped to 3.09% — its highest level since July 2011 — while two-year notes climbed to highest level since 2008 at 2.593%, raising expectations for further interest rate hikes from the Federal Reserve. The 10-year yield has rallied 76% over the past year, with a 13.8% gain in the last five days alone (read: 8 Inverse Bond ETFs to Profit Out of Rising Yields).

In particular, the latest April retail sales data, which showed a 0.3% increase in sales and an upward revision in February and March sales, led to the latest spike in yields giving another sign of firmer inflation.  

As yields rises, returns of investors having big holdings in the fixed income world are hurt. And bond investors might experience heavy losses given that bond prices and yields have an inverse relationship. With the inclusion of ultra-short duration bonds ETFs, this hostile situation can be avoided. Investors could add these products to their portfolio in order to minimize the risk from rising interest rates.

Why Ultra-Short Bond ETFs?

Ultra-short bond ETFs invest in securities with durations of less than one year, thus making them less vulnerable to rising rates. As the duration or interest rate sensitivity is lower, these act as a cushion to rising rates. Additionally, the time until maturity is short enough, so the odds of a substantial increase in rates during the life of the bond are lower.

As a result, an allocation to ultra-short duration ETFs could help in protecting the portfolio from rising rates. Below, we have presented some of these:

iShares Short Treasury Bond ETF SHV

The fund is actively managed and seeks to manage interest rate risk while maximizing current income through diversified exposure to short-term bonds. It holds 25 securities in its basket, with both average maturity and effective duration of 0.40 years. The product has amassed $13.6 billion in its asset base while trades in a solid volume of 1.3 million shares a day. It charges 15 bps in annual fees and has added 0.5% so far this year (read: Will Bond ETFs Sustain Their April Momentum in May?).

SPDR Bloomberg Barclays 1-3 Month T-Bill ETF BIL

The product seeks to provide exposure to zero coupon U.S. Treasury securities that have a remaining maturity of 1-3 months. It follows the Bloomberg Barclays 1-3 Month U.S. Treasury Bill Index, holding 9 securities in its basket. Both average maturity and effective duration comes in at 0.13 years. BIL has AUM of $3.5 billion and average daily volume of 859,000 shares. It charges 13 bps in annual fees and is up 0.5% in the year-to-date time frame.

Goldman Sachs TreasuryAccess 0-1 Year ETF GBIL

The fund seeks to track the Citi US Treasury 0–1 Year Composite Select Index, which is designed to measure the performance of U.S. Treasury Obligations with a maximum remaining maturity of one year, through an easy access vehicle. Holding 14 securities in its basket, it has average maturity and effective duration of 0.34 years each. The ETF has an expense ratio of 0.12% and trades in a lower volume of 77,000 shares. It has amassed $1.2 billion in its asset base and has gained 0.2% so far this year (read: Why Short-Term Bond ETFs Could be Back in Favor).

JPMorgan Ultra-Short Income ETF JPST

JPST seeks to deliver current income while managing risk. It invests primarily in a diversified portfolio of short-term, investment-grade fixed and floating-rate corporate and structured debt while actively managing credit and duration exposure. The fund holds 390 securities in its basket with effective duration of 0.50 years. It has accumulated $641.4 million in its asset base while trades in a good volume of around 134,000 shares a day. It charges 18 bps in annual fees and is up 0.7% in the year-to-date time frame.

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