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Inside the New iShares Ultra Short Term Bond ETF

Zacks Equity Research

Though San Francisco-based iShares dominates the equity ETF market, it is also looking to expand its offering into the fixed income space as well.
Short-term bond funds have gained immense popularity over the past couple of months in anticipation of rising interest rates should the Fed start tapering. In order to make the most of the growing demand for these funds, iShares launched iShares Short Maturity Bond ETF (NEAR)
The new fund would provide investors’ another option to play in the fixed income space seeking broad exposure to the ultra-short term bonds while protecting them from rising interest rates (read: STPP: A Great Bond ETF For Rising Rates). With this introduction, the firm’s total bond ETFs line-up reaches 60.
NEAR in Focus
This new ETF is an actively managed fund that does not seek to replicate the performance of a specified index. Instead, it looks to maximize current income by investing 80% of the total assets in U.S. investment-grade debt.
The product seeks to provide broad exposure across various fixed income securities such as Treasuries, corporate bonds, asset-backed debt and commercial mortgage-backed securities (see more in the Zacks ETF Center).
The effective duration of the fund is expected to be one year or less while average maturity would be less than three years. The product will charge investors a low fee of 25 basis points a year for its diverse exposure.
How does it fit in a portfolio?
The new product appears an interesting choice for investors given concerns over the rising interest rates and the resultant shift toward the short-term fixed-income bonds. When rates eventually do rise, the short duration securities will likely be less volatile and less impacted than the long-term bond funds (read: Coming Soon: Rising Rates ETF).
Further, the fund is one of the cheapest options in the short-term bond market ETF space.
Can it Succeed?
While there are only a few short-term bond funds, NEAR could face stiff competition from the PIMCO Enhanced Short Maturity ETF (MINT). PIMCO uses an active approach and focuses in on short-duration American securities that are ultra-safe (see: all the Ultra-Short Term Bond ETFs here).
The fund has effective duration of 1.01 years and average maturity of 1.04 years. Additionally, the 30-day SEC yield stands at just 0.50%.
The PIMCO product has been successful this year so far, beating the ultra-popular Total Return ETF (BOND) in terms of AUM for the first time. MINT has become the largest actively managed ETF with over $4.2 billion in its asset base. The fund has an expense ratio of 0.35%.
Given the huge success of MINT, it would not be difficult for the new iShares bond ETF to see big inflows and solid investor interest given the thrust for the short-term bond funds amid interest rate uncertainty.  However, competition is certainly stiff, so this space could definitely be one to watch in the months ahead, and especially so if the current trend continues in the fixed income space.
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Read the analyst report on NEARRead the analyst report on MINTRead the analyst report on BONDZacks Investment Research
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