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Short-Duration Bond ETF Sees Inflow Surge


Yields on 10-year U.S. Treasuries have come in since the September peak, which was dangerously close to the ominous 3% level, but on a year-to-date basis, those yields have surged 42.5%.

Predictably, the spike in Treasury yields has sent investors scurrying out of longer-duration bonds and the exchange traded funds that hold those issues. Some bond ETFs have been losing muscle as investors see an end to the three-decade long Treasuries bull rally and shift into equities due to depressed interest rates. [Investors Selling Bond ETFs as Rates Jump]

So brutal have the outflows been from ETFs with exposure to what investors perceive as the wrong durations that iShares Barclays TIPS Bond ETF (TIP) has lost over $7 billion in assets this year. The Vanguard Total Bond Market ETF (BND) has bled almost $605 million as bond investors have sought out short-duration fare. [ETF Spotlight: Vanguard Short-Term Bond ETF]

One of the winners in the race to short-duration ETFs has been the Vanguard Short-Term Bond ETF (BSV) . BSV raked in $13.8 billion this year as of Oct. 30, reports Murray Coleman for the Wall Street Journal. BSV has an average effective duration, or rate sensitivity, of 2.5 years, according to the Journal.

BSV tracks “the Barclays U.S. 1–5 Year Government/Credit Float Adjusted Index, a market-weighted bond index that covers investment-grade bonds with a dollar-weighted average maturity of 1 to 5 years,” according to Vanguard. Investors have also embraced BSV because of its low fees; 0.1% per year, making it cheaper than 88% of rival funds, according to issuer data.

Nearly 70% of BSV’s 1,753 holdings are U.S. government bonds with the rest of the portfolio comprised of high-grade corporates and dollar-denominated foreign bonds.

While BSV offers some protection from rising rates, there is a rub. BSV is only up 0.4%, which is better than the 1.5% lost by BND, but the former also only yields 0.75%. That is less than the rates offered on savings accounts from American Express (AXP), Discover Financial (DFS) and General Electric (GE).

Vanguard Short-Term Bond ETF

ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. 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.