U.S. Markets closed

Ultra-Short-Term Bond ETFs as Cash Alternatives


As investors plan for retirement, income generated from stocks and fixed-income positions will be used to cover short-term living expenses, or the revenue can be stashed away in a cash equivalent, such as ultra-short-term bond exchange traded funds.

In an aggressive ETF portfolio for couples with a 25-year or longer time frame until retirement, the cash component can make up about 8% of the total investment portfolio, according to Morningstar’s Christine Benz. These funds should be used to help meet daily expenditures over the near-term, or one to two years.

Instead of parking cash in a certificates of deposit account or money market accounts and funds, investors can take a look at ultra-short-duration bond ETFs. [Sorting Through Short-Duration Bond ETFs]

For example, the SPDR Barclays 1-3 Month T-Bill ETF(BIL) provides access to 1-3 month U.S. Treasury bills. Consequently, the fund has a duration of 0.13 years – a 1% increase in interest rates would translate to about a 0.13% decline in the ETF’s price. BIL has a 0.1345% expense ratio and a -0.07% 30-day SEC yield. The fund is unchanged so far this year.

Alternatively, the SPDR SSgA Ultra Short Term Bond ETF (ULST) tracks a group of investment grade debt, including corporate bonds – corporate industrials is 38.6% of the fund, corporate finance is 32.7%, asset-backed securities are 25%, Treasuries are 1.5%, non-corporates are 1.5%. ULST has a slightly higher 0.21 year duration and a 0.35% 30-day SEC yield. The fund comes with a more expensive 0.20% expense ratio. The ETF is up 0.3% year-to-date.

Additionally, investors who are comfortable with more risk can consider actively managed bond ETFs, such as the PIMCO Enhanced Short Maturity ETF (MINT) and the Guggenheim Enhanced Short Duration Bond (GSY) .

MINT includes emerging market and developed market government, corporate, mortgage-related short-term investment-grade debt. The ETF has a 0.68 year duration and comes with a 0.53% 30-day SEC yield. MINT is also slightly more expensive due to its active component, with a 0.35% expense ratio. The fund is also up 0.22% year-to-date.

GSY also includes international government and corporate debt, and it can hold up to 10% of its assets in high-yield, junk debt. The ETF has a 0.33 year duration, 0.28% expense ratio and a 0.93% 30-day SEC yield. The fund is up 0.3% year-to-date.

While investors can utilize these funds as an alternative to cash, Benz warns that the ultra safe funds can produce yields lower than true cash instruments, and investors may find that bond funds will see small fluctuations.

“Such investment types don’t guarantee–either implicitly or explicitly–that your principal value won’t fluctuate,” Benz said.

For more information on investing toward retirement, visit our retirement 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.