Time for Short-Term Bond ETFs to Tap Outsized Yields?

U.S. stocks experienced largest weekly outflows in 11 weeks as investors brace for likely huge Fed rate hike, as quoted on a MarketWatch article. However, ultra short-term bond ETFs like iShares Short Treasury Bond ETF SHV and SPDR Bloomberg 1-3 Month T-Bill ETF BIL amassed about $1.99 billion and $1.52 billion in assets, respectively, last week.

Rising rate worries are gripping the whole world, crippling the investing scenario again with uncertainty. Volatility may become the name of the game thanks to a host of factors ranging from rising inflation in the United States and other parts of the developed world, fears of a slowdown in China and the resultant pressure on supply chain and global growth, and geopolitical issues.

Wall Street was off to the worst start to a year in 2022 since 1939. And some analysts believe that more crashes are in the cards as U.S. recessionary fears are rife now. As rising rate worries have been prevalent with the Fed hiking rates faster and fatter this year, the bond investing is also at worse. This happens because, bond prices share an inverse relationship with bond yields. Stocks are, in any case, at shambles.

Hence, cash could emerge as a popular asset. Cash is king for investor portfolios right now, according to Morgan Stanley, as quoted on CNBC.

Why Buying Short-Term Bond ETFs Makes Sense Now

Investors sold their possessions to retain money in the wake of the heightened uncertainty caused by a market crash. The road ahead is a bit unclear. Hence, we believe cash and short-dated fixed income may play a greater role in adding stability to a portfolio.

This is especially true given that the Fed will keep on hiking rates this year and short-term bond yields will rise alongside. That would result in a similar rate for cash-like assets such as money-market funds. As of Sep 11, 2022, there are 91% chance of a 75 bps of a rate hike in the September meeting while 9% probability is of a 50-bp rate hike, per CME Fed Watch Tool. As of September 9, 2022, yield on one-year U.S. treasury note was 3.67%, higher than the 10-year note (i.e., 3.33%).

Below we highlight a few short-term bond ETFs and their performance plus yields.

iShares 1-3 Year Treasury Bond ETF SHY

The underlying IDC US Treasury 1-3 Year Index (4PM) assesses U.S. Treasury issued debt. Only U.S. dollar denominated, fixed rate securities with minimum term to maturity greater than one year and less than or equal to three years are included. The fund charges 15 bps in fees.

Vanguard Short-Term Bond ETF BSV

The underlying Bloomberg U.S. 1-5 Year Government/Credit Float Adjusted Index includes U.S. Treasury and agency obligations, as well as investment-grade corporate and international dollar-denominated bonds, all having maturities of 1 to 5 years. The fund charges 4 bps in fees.

Vanguard Short-Term Treasury ETF VGSH

The underlying Bloomberg US Treasury 1-3 Year Bond Index includes fixed income securities issued by the U.S. Treasury all with maturities between 1 and 3 years. The fund charges 4 bps in fees.

Schwab ShortTerm U.S. Treasury ETF SCHO

The underlying Bloomberg US Treasury 1-3 Year Index includes all publicly-issued U.S. Treasury securities that have a remaining maturity of greater than or equal to one year and less than three years and are rated investment grade and have $250 million or more of outstanding face value. The fund charges 3 bps in fees.

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iShares Short Treasury Bond ETF (SHV): ETF Research Reports
 
iShares 13 Year Treasury Bond ETF (SHY): ETF Research Reports
 
Vanguard ShortTerm Treasury ETF (VGSH): ETF Research Reports
 
Schwab ShortTerm U.S. Treasury ETF (SCHO): ETF Research Reports
 
SPDR Bloomberg 13 Month TBill ETF (BIL): ETF Research Reports
 
Vanguard ShortTerm Bond ETF (BSV): ETF Research Reports
 
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