Ultra-Short Bond ETFs to Hedge Against Rising Rates

The Federal Reserve has been aggressive in bringing down inflation, which is near its highest levels since the early 1980s. In its fight, Fed Chair Jerome Powell raised interest rates by another 75 bps in the meeting concluded yesterday. This marks the third consecutive rate hike of 0.75% and pushed the benchmark interest rate to 3.0-3.25%, the highest level since 2008.

The yield on 10-year Treasury notes jumped to a high of 3.64%, its highest level since February 2011, while the 2-year yield topped 4.1%, its highest level since 2007. As yields rise, returns of investors having big holdings in the fixed income world are hurt. And bond investors might experience heavy losses given that bond prices and yields have an inverse relationship (read: Bet on Bank ETFs on Fed Rate Hike).

With the inclusion of ultra-short duration bonds ETFs like iShares Short Treasury Bond ETF SHV, JPMorgan Ultra-Short Income ETF JPST, SPDR Bloomberg 1-3 Month T-Bill ETF BIL, PIMCO Enhanced Short Maturity Active ETF MINT, and BlackRock Ultra Short-Term Bond ETF (ICSH), this hostile situation can be avoided. Investors could add these products to their portfolios in order to minimize the risk from rising interest rates.

Ultra-short bond ETFs invest in securities with durations of less than one year, thus making them less vulnerable to rising rates. As the duration or interest rate sensitivity is lower, these act as a cushion to rising rates. Additionally, the time until maturity is short enough, so the odds of a substantial increase in rates during the life of the bond are lower. As a result, an allocation to ultra-short duration ETFs could help in protecting the portfolio from rising rates.

The central bank also signaled that additional large rate hikes were likely at upcoming meetings as it combats inflation that remains near a 40-year high. Fed officials now expect the federal funds rate at a range of 4.25% to 4.5%, a full percentage point above the 3.25% to 3.5% projected in June, to end 2022. This means that the central bank could approve another three-quarter point hike at its November meeting and then a half-point rate rise in December.

iShares Short Treasury Bond ETF (SHV)

iShares Short Treasury Bond ETF provides exposure to U.S. Treasury bonds that mature in less than one year and follows the ICE Short US Treasury Securities Index. It holds 50 securities in its basket, with both, average maturity of 0.31 years and an effective duration of 0.30 years.

iShares Short Treasury Bond ETF has amassed $23 billion in its asset base while trading in a solid volume of 3.5 million shares a day. It charges 15 bps in annual fees and has a Zacks ETF Rank #4 (Sell) with a Medium risk outlook.

JPMorgan Ultra-Short Income ETF (JPST)

JPMorgan Ultra-Short Income ETF invests primarily in a diversified portfolio of short-term, investment grade fixed-and floating-rate corporate and structured debt while actively managing credit and duration exposure. It holds 620 bonds in its basket with an average duration of 0.29 years (read: Time for Short-Term Bond ETFs to Tap Outsized Yields?).

JPMorgan Ultra-Short Income ETF has accumulated $21.8 billion in its asset base while trading in a good volume of around 4.1 million shares a day. It charges 18 bps in annual fees.

SPDR Bloomberg 1-3 Month T-Bill ETF (BIL)

SPDR Bloomberg 1-3 Month T-Bill ETF seeks to provide exposure to zero-coupon U.S. Treasury securities with a remaining maturity of 1-3 months. It follows the Bloomberg 1-3 Month U.S. Treasury Bill Index, holding 15 securities in its basket. Both average maturity and adjusted duration come in at 0.10 years each.

SPDR Bloomberg 1-3 Month T-Bill ETF has AUM of $21.2 billion and an average daily volume of 5.2 million shares. It charges 14 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

PIMCO Enhanced Short Maturity Active ETF (MINT)

PIMCO Enhanced Short Maturity Active ETF is actively managed that seeks greater income and total return potential than traditional cash investments in exchange for a modest increase in risk. It primarily invests in short-duration investment grade debt securities. PIMCO Enhanced Short Maturity Active ETF holds 652 securities in its basket, with an average maturity of 0.49 years and an effective duration of 0.44 years.

PIMCO Enhanced Short Maturity Active ETF has accumulated $11.3 billion in its asset base while trading in a solid volume of around 1.1 million shares a day. It charges 35 bps in annual fees.

BlackRock Ultra Short-Term Bond ETF (ICSH)

BlackRock Ultra Short-Term Bond ETF is actively managed and seeks to provide income by investing in a broad range of short-term U.S. dollar-denominated investment-grade fixed- and floating-rate debt securities and money market instruments. It holds 241 securities in its basket and charges 8 bps in annual fees. Average maturity and effective duration come at 0.65 years and 0.42 years, respectively (read: How to Play Ongoing Uncertainties With ETFs?).  

BlackRock Ultra Short-Term Bond ETF has amassed $6.8 billion in its asset base while trading in volume of 1.2 million shares per day on average.

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iShares Short Treasury Bond ETF (SHV): ETF Research Reports
 
PIMCO Enhanced Short Maturity Active ETF (MINT): ETF Research Reports
 
SPDR Bloomberg 13 Month TBill ETF (BIL): ETF Research Reports
 
JPMorgan UltraShort Income ETF (JPST): ETF Research Reports
 
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