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Hedge Against Rising Rates With Ultra-Short Bond ETFs

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The Federal Reserve once again raised interest rates but the pace of the rate hike slowed down. It raised rates by 50 bps as expected and signaled more increases next year to rein in inflation. This marks the seventh rate hike this year. The rate hike brings the benchmark interest rate to 4.25%-4.50% — the highest level in 15 years (read: ETFs to Benefit as Inflation Drops to One-Year Low).

The central bank now projects at least 75 bps of rate hike, peaking at 5.1% by the end of 2023, 50 bps higher than the previously projected 4.6% back in September. The rate will then be cut to 4.1% in 2024. With the rise in interest rates, yields also move higher, hurting the returns of investors having big holdings in fixed income. Bond investors might experience heavy losses, given that bond prices and yields have an inverse relationship.

With the inclusion of ultra-short duration bonds ETFs like iShares Short Treasury Bond ETF (SHV - Free Report) , JPMorgan Ultra-Short Income ETF (JPST - Free Report) , SPDR Bloomberg 1-3 Month T-Bill ETF (BIL - Free Report) , PIMCO Enhanced Short Maturity Active ETF (MINT - Free Report) and BlackRock Ultra Short-Term Bond ETF (ICSH - Free Report) , 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 against 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.

iShares Short Treasury Bond ETF (SHV - Free Report)

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 40 securities in its basket, with an average maturity of 0.30 years and an effective duration of 0.29 years (read: ETF Asset Report for November).

iShares Short Treasury Bond ETF has amassed $19.6 billion in its asset base while trading in a solid volume of 3.2 million shares a day. It charges 15 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

JPMorgan Ultra-Short Income ETF (JPST - Free Report)

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 0.27 years.

JPMorgan Ultra-Short Income ETF has accumulated $23.4 billion in its asset base while trading in a good volume of around 4.8 million shares a day. It charges 18 bps in annual fees.

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

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 17 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 $25.7 billion and an average daily volume of 6.2 million shares. It charges 14 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook.

PIMCO Enhanced Short Maturity Active ETF (MINT - Free Report)

PIMCO Enhanced Short Maturity Active ETF is actively managed that seeks greater income andtotal 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 581 securities in its basket, with an average maturity of 0.51 years and an effective duration of 0.44 years (read: Low-Beta ETFs to Counter Market Volatility).

PIMCO Enhanced Short Maturity Active ETF has accumulated $9 billion in its asset base while trading in a solid volume of around 1.3 million shares a day. It charges 35 bps in annual fees.

BlackRock Ultra Short-Term Bond ETF (ICSH - Free Report)

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 235 securities in its basket and charges 8 bps in annual fees. Average maturity and effective duration come at 0.61 years and 0.39 years, respectively.  

BlackRock Ultra Short-Term Bond ETF has amassed $7 billion in its asset base while trading in a volume of 1.3 million shares per day on average.

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