Back to top

Image: Bigstock

Hold 3 Short-Term Bond ETFs till Maturity & Earn 5%+ Yield

Read MoreHide Full Article

Wall Street has been going into a tailspin due to rising rate worries and stagflation fears. The Federal Reserve increased its benchmark interest rate by half a percentage point last week, matching market expectations. This marked the biggest hike in two decades in the United States. In addition, the central bank drew a program in which it will ultimately lower its bond holdings by $95 billion a month.

Fed Chairman Jerome Powell stressed on the commitment to tame inflation but indicated that raising rates by 75 basis points at a time “is not something the committee is actively considering,” per a CNBC article (read: Biggest U.S. Rate Hike Since 2000 in May: Sector ETFs to Win).

As far as rates are concerned, the benchmark treasury yield started the week ended May 6 with 2.99% and closed the week at 3.12%, hitting highest level since 2018. As rising rates wreak havoc both on equities and bonds market, investors are finding themselves clueless about future investments. After all, the S&P 500 is down 13.5% this year and was off 0.2% last week. iShares 20+ Year Treasury Bond ETF (TLT - Free Report) is off 23.3% this year and 3% last week.

Against this backdrop, investors can tap short-term bond ETFs that yield handsomely. Due to lower duration and maturity, these bonds offer lesser risks amid a rising rate environment, though these are high-yield in nature. These bond ETFs have solid yield-to-maturity (YTM). Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures.

ETFs in Focus

Invesco Global Short Term High Yield Bond ETF (PGHY - Free Report) – YTM 11.03%

The underlying Invesco Global Short Term High Yield Bond ETF is based on the DB Global Short Maturity High Yield Bond Index (Index). The Fund generally will invest at least 80% of its total assets in US and foreign short-term, non-investment grade bonds that comprise the Index, all of which are denominated in U.S. dollars.

The fund does not purchase all of the securities in the Index; instead, the Fund utilizes a “sampling” methodology to seek to achieve its investment objective. The Fund and the Index are rebalanced quarterly and re-weighted annually. The fund’s effective duration is 1.24 years, indicating lower interest rate risks. Its years to maturity is 1.43 years, indicating lower default risks. The fund is down 0.6% last week and 6% this year.

iShares iBonds 2023 Term High Yield and Income ETF (IBHC - Free Report) – YTM 5.46%

The fund gives exposure to a diversified universe of high yield and BBB-rated corporate bonds maturing between January 1, 2023 and December 15, 2023 in a single fund. Weighted Avg Maturity of the fund is 1.07 years while effective duration is 1.05 years. Option Adjusted Spread as of May 05, 2022 is 315.13 bps meaning the fund has earned this much of incremental yield over similar duration U.S. treasuries. The fund is down 0.4% last week and is off 2.5% this year.

Invesco BulletShares 2023 High Yield Corporate Bond ETF (BSJN - Free Report) – YTM 5.81%

The fund follows the Bulletshares USD High Yield Corporate Bond 2023 Index. The fund will invest at least 80% of its total assets in corporate bonds that comprise the Index. The Index looks to measure the performance of a portfolio of US dollar-denominated, high yield corporate bonds with effective maturities in 2023. The fund’s effective duration is 2.39 years. The fund is down 1.1% last week and 4.5% this year.