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Keeping a Short Duration Leash on Bond ETFs

This article was originally published on ETFTrends.com.

The current interest environment is compelling investors to consider short-term bond funds, including the iShares Short Treasury Bond ETF (SHV) and the iShares Short-Term Corporate Bond ETF (IGSB).

When it’s no longer profitable to go long on government debt, the ideal move would be to go the opposite direction–this is where SHV comes into play. As yield curves flatten and an outflux of investor capital leaves the safe havens of government debt, SHV, which tracks the investment results of the ICE U.S. Treasury Short Bond Index, could be in play.

“The current market environment is unusual, however. A flatter yield curve means that short bonds are providing similar income to their longer-maturity counterparts–while still reducing interest rate risk,” said BlackRock in a recent note.

IGSB tracks a benchmark where 90 percent of its assets will be allocated towards a mix of investment-grade corporate debt and sovereign, supranational, local authority, and non-U.S. agency bonds that are U.S. dollar-denominated and have a remaining maturity of greater than one year and less than or equal to three years–this shorter duration is beneficial during recessionary environments.

Shorter The Better?

The $15.37 billion SHV tracks the ICE U.S. Treasury Short Bond Index and holds 25 bonds. SHV's effective duration is just 0.33 years, explaining its popularity in a year in which the Federal Reserve has boosted interest rates twice. Bond market observers widely expect two more rate hikes before year-end with one coming at the Fed's September meeting.

Related: A Refreshed Look at an Intermediate-Term Corporate Bond ETF

Year-to-date, investors have added $7.35 billion in new assets to SHV, good for the best inflows among any fixed income ETF and the fourth-best total overall among US-listed ETFs.

“The choice between ultra-short, short-term or floating rate bonds depends on your holding period and investment objectives,” said BlackRock. “For a very short-term holding period, consider sticking to high-quality ultra-short maturities, such as less than one year. If you have a longer holding period (over 12 months), short-maturity fixed-rate bond ETFs can provide more income potential during rising rate periods if you can tolerate the price changes over the period.”

For more trends in fixed income, visit the Fixed Income Channel.