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Fixed-Income ETFs That May Benefit from Rising Rates


With the Federal Reserve likely to hike short-term rates from near zero levels, one group of fixed-income investors who utilize money market funds and ultra-short-term bond exchange traded funds as cash alternatives may stand to benefit.

The extended near-zero-rate environment has depressed returns for money market funds that invest in assets with maturities of 12 months or less, reports Joe Rennison for the Financial Times. Consequently, with the Fed set to hike rates for the first time in almost a decade, these ultra-short-term cash equivalents could begin to offer higher yields.

“It will be great news for money market funds,” Debbie Cunningham, chief investment officer at Federated Investors, told the Financial Times. “It means the return from our portfolio composition back to the end shareholders is improving and that hasn’t happened since 2008.”

Yields on short-term debt are already moving higher, with three-month Treasury bills showing yields that have doubled to 24 basis points over the past month.

“Money market funds are absolutely ecstatic. For the first time in a decade they are going to be in a rate-rising environment,” Joseph Abate, a rates strategist at Barclays, told the Financial Times.

In anticipation of the higher rates, some money market funds have already been reducing their maturity exposure to take full advantage of higher rates as soon as possible. The weighted average maturity of prime institutional money market funds stood at 28 days last week from 32 days at the start of October, according to Crane data.

Investors who use ultra-short-term bond ETFs as money fund alternatives may look to actively managed options that are more free to adapt holdings in a shifting market environment.

For example, the PIMCO Enhanced Short Maturity ETF (MINT) has a 1.13% 30-day SEC yield and a 0.37 year duration. The Guggenheim Enhanced Short Duration Bond (GSY) has a 1.04% 30-day SEC yield and a 0.17 year duration. The SPDR SSgA Ultra Short Term Bond ETF (ULST) has a 0.51% 30-day SEC yield and a 0.26 year duration. The iShares Short Maturity Bond ETF(NEAR) has a 0.90% 30-day SEC yield and a 0.35 year duration.

Potential investors should be aware that these active ultra-short-term bond ETFs include corporate debt exposure with some lower quality investment-grade debt exposure, which may have contributed to their relatively higher yields.

For more information on money market alternatives, visit our money markets category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.