Under The Hood: Short Term Bond ETFs

Under The Hood: Short Term Bond ETFs

After six Fed rate hikes in the past 2 1/2 years, it finally pays to hold cash. 

Senior ETF Analyst
Reviewed by: Sumit Roy
Edited by: Sumit Roy

Over the past 10 years, it’s become conventional wisdom that holding cash doesn’t pay. Ever since the Federal Reserve famously cut its benchmark federal funds rate to zero in the wake of the financial crisis in 2008, cash has yielded close to nothing.

But that’s changing. After six Fed rate hikes since December 2015—and another one likely in June—cash is starting to look more attractive. The overnight federal funds rate is expected to near 1.9% next month, and could hit 2.4% by year-end if the “four rate hikes in 2018” camp is right.

While historically still low, those are pretty good yields compared with the zero that investors have come to expect in recent years.

Cash No Longer Trash

“Cash has once again become a legitimate asset class,” remarked Josh Jenkins, portfolio manager at CLS Investments.

Jenkins notes that the yield on the six-month Treasury bill recently hit a 10-year high of 2.12%, topping the dividend yield on the S&P 500 for the first time since the financial crisis.

Cash is also looking more attractive on a relative basis, he says: “The flattening of the yield curve implies investors are getting paid less by extending maturity. You’ll pick up less than 1% in additional income by extending out to the 10-year Treasury bond, and you’ll have to take on about eight years in additional duration. All things considered, that is not a great trade-off.”

“Picking up additional income by taking on credit risk does not look great either,” Jenkins added. “High-yield bonds, for example, are trading near the lowest spread to Treasury bonds of the current cycle.”

Yields & Inflows Picking Up

With cash yields on the rise, investors are taking notice. Ultra short-term bond ETFs—money-marketlike funds that hold bonds with less than one year until maturity—have seen hefty inflows so far this year. Yields on these funds are strongly correlated with the federal funds rate.

The most popular is the iShares Short Treasury Bond ETF (SHV), which garnered inflows of $5.9 billion this year, nearly doubling its assets.

SHV tracks an index of Treasury bonds that mature in less than one year, and currently has a 30-day SEC yield of 1.79%.

Meanwhile, the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL), a fund that is even more “cashlike” in its holdings, also doubled its assets this year, thanks to inflows of $1.5 billion. BIL has a current 30-day SEC yield of 1.56%.

Actively managed competing products like the PIMCO Enhanced Short Maturity Active ETF (MINT) and the iShares Short Maturity Bond ETF (NEAR) have also seen interest, picking up $1.3 billion and $900 million, respectively, this year.

Both funds are more aggressive than SHV and BIL, with durations slightly higher and holdings stretching outside of Treasuries into corporates, mortgage-backed securities, and even dollar-denominated emerging market debt, in the case of MINT.

MINT has a current 30-day SEC yield of 2.19%, while NEAR has an equivalent yield of 2.29%.

Not All Short-Duration ETFs Created Equal

SHV, BIL, MINT and NEAR are by no means the only ETFs in the ultra-short-term bond space. There are a number of funds that provide low-duration exposure. Some exclusively hold Treasuries; others take on riskier debt. Some limit their maturities to one year or less; others hold longer maturities.

Generally, fixed-income instruments with maturities of less than five years are considered short term, while instruments with maturities of less than one year are considered ultra-short term.

Wading away from Treasuries may boost yields but adding credit risk. Taking on longer maturities may add yield at the expense of greater interest rate risk.

“Not all short duration ETFs are created equal. They all have their own risk and return profiles,” said Kelly Ye, director of research for IndexIQ. “The majority of the short-duration ETFs are composed of short maturity bonds, which still have some interest rate risk. Floating-rate ETFs can benefit from a rising rate environment, but they’re subjected to liquidity, credit and call risk. Interest-rate-hedged products could subject investors to curve risk.”

According to Ye, there is no “one size fits all” ETF for investors.

“Short-duration Treasury ETFs are good for investors looking for cash equivalent and value safety above all,” she added, “while short-duration corporate bond/bank loan ETFs are for investors willing to take credit risk to pick up incremental yield.”

Things To Consider

With dozens of short-term and ultra-short-term bond ETFs on the market, investors must do their due diligence to determine which product is right for them.

Jordan Farris, managing director of ETF product development for Nuveen, recommends investors consider funds that offer an attractive yield—something that will generally outpace inflation—and minimizes interest rate risk while still achieving income objectives.

Meanwhile, CLS’ Jenkins advises that investors have a clear vision of what they want out of their allocation to short-term bonds.

“Some decision points to help narrow the available options include active versus passive, fixed versus floating, one year or less versus one- to three-year maturity, and government versus spread sector, he explained. “These decisions will impact expected risk and return. Other factors to analyze include cost, liquidity, portfolio construction, tracking error (for passive ETFs), and manager process and philosophy (for active ETFs).”

Most Popular Short-Term Bond ETFs Of 2018

For a list of the short-term bond ETFs that are seeing the most interest this year, see the table below. Also, check out the ETF.com channels on short-term and ultra-short-term bond ETFs.


TickerFundYTD Inflows ($M)
SHViShares Short Treasury Bond ETF5,878
FLOTiShares Floating Rate Bond ETF2,870
SHYiShares 1-3 Year Treasury Bond ETF2,589
BILSPDR Bloomberg Barclays 1-3 Month T-Bill ETF1,454
FLRNSPDR Bloomberg Barclays Investment Grade Floating Rate ETF1,323
MINTPIMCO Enhanced Short Maturity Active ETF1,300
NEARiShares Short Maturity Bond ETF905
ISTBiShares Core 1-5 Year USD Bond ETF793
SPSBSPDR Portfolio Short Term Corporate Bond ETF765
BSVVanguard Short-Term Bond ETF692
FTSMFirst Trust Enhanced Short Maturity ETF666
JPSTJPMorgan Ultra-Short Income ETF606
SCHOSchwab Short-Term US Treasury ETF557
VGSHVanguard Short-Term Treasury Index ETF521
STIPiShares 0-5 Year TIPS Bond ETF418
GBILGoldman Sachs TreasuryAccess 0-1 Year ETF340
LMBSFirst Trust Low Duration Opportunities ETF331
SHYGiShares 0-5 Year High Yield Corporate Bond ETF309
VTIPVanguard Short-Term Inflation-Protected Securities ETF300
SHMSPDR Nuveen Barclays Short Term Municipal Bond ETF255

Data measures the year-to-date period through May 24, 2018.


Email Sumit Roy at [email protected] or follow him on Twitter sumitroy2

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.