U.S. Markets closed

Investors Use Short-Term Bond ETFs to Hedge Rising Rates


Investors shifted assets in fixed-income portfolios in response to the rising rate environment, shifting into short-duration bond exchange traded funds. Now on the lowest end of the spectrum, investors have more ultra-short-duration options.

“We are seeing tremendous flows year to date in short and ultra short term bonds, as investors are increasingly anticipating rising interest rates.” James Ross, senior managing director and global head of SPDR ETFs at SSgA, said in a note.

According to Morningstar data, investors added $17 billion in short-term funds while redeeming $49 billion from intermediate-term funds over the first eight months of the year, reports Stan Luxenberg for WealthManagement.

Bond prices and yields have an inverse relationship. As rates rise, bond prices take a hit. Over the first eight months of the year, investors who made the shift were rewarded, with intermediate funds declining 2.7%, whereas short-term funds only dipped 0.4%.

Investors have been pushing up rates as speculators tried to time the Fed’s eventual change to its accommodative monetary policies.

Bond Guru Bill Gross has also advised investors to shift over to lower-maturity bonds. For instance, in his flagship PIMCO Total Return Fund, Gross cut the duration of holdings to 4.42 years from 5.06 years as of Sept. 30, reports Wes Goodman for Bloomberg. Duration is a measure of a bond fund’s sensitivity to changes in interest rates, and a higher duration corresponds to a greater negative effect if rates do rise. [Here’s How The Bill Gross ETF Shapes Up]

“It’s front-end friendly,” Gross said in the Bloomberg article, referring to short-term securities. “Anything that is anchored to the policy rate — and the policy rate being something that probably is going to be 25 basis points for at least the next several years — anything that’s anchored to that will do well and had done well.”

In response to the changing rate environment, State Street and iShares recently launched actively managed ultra-short-term bond funds to help investors, including the SPDR SSgA Ultra Short Term Bond ETF (ULST)   and iShares Short Maturity Bond ETF(NEAR) . [State Street Introduces Short Term Bond ETF]

Previously, investors could choose from active short-term bond ETFs, the PIMCO Enhanced Short Maturity ETF (MINT) , which has a 0.51% 30-day SEC yield and 0.90 year effective duration, and the Guggenheim Enhanced Short Duration Bond (GSY) , which has a 0.20 year duration and 0.93% 30-day SEC yield.

Additionally, there a some passive index-based ETF options, like the iShares Short Treasury Bond ETF (SHV) , which has an effective duration 0.46 years and 0.00% 30-day SEC yield, and the SPDR Barclays 1-3 Month T-Bill (BIL) , which has an effective duration 0.14 years and -0.08% 30-day SEC yield.

For more information on bond funds, visit our bond ETFs 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.