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No Rate Cut Until Summer? High-Yield Short-Term Bond ETFs to Buy
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Atlanta Fed President Raphael Bostic, a voting member of the Federal Open Market Committee (FOMC), shared insights with CNN in an exclusive interview, as quoted on Yahoo Finance. Bostic revealed his anticipation of the nation's inflation rate, currently at around 3%, dropping to "the lower twos" by the end of 2024. With that outlook, first rate cut could come in summertime, per Bostic.
The aforementioned forecast aligns with his expectation of inflation nearing the Federal Reserve's 2% target. Bostic expressed surprise and satisfaction with the robustness of the labor market. The January jobs report, which saw the addition of 353,000 new jobs, exceeded economists' expectations.
The unemployment rate remained below 4% for the 24th successive month. Bostic indicated that with low unemployment rates, people boosted purchasing power, leading to elevated prices. Following the Fed's first policy meeting of the year, there was a shift in market expectations regarding the timing of interest rate cuts.
Short-Term Rates Have Been Solid Right Now
Despite earlier speculations of rate cuts as early as March, the FOMC emphasized the need for greater confidence in sustained inflation movement towards the target level. Hence, short-term bond yields remained solid lately. Two-month U.S. treasury bond yield was 5.51% on Feb 12, 2024 against 4.17% yield produced by the 10-year U.S. treasury note.
Why Buying Cash-Like ETFs Makes Sense Now
The road ahead in the investing world is a bit unclear. Although the stock market remained at a lofty level, overvaluation concerns remain. The Fed is also unlikely to move fast on policy easing. Plus, we’ll have presidential election this year, which may cause quite an uncertainty.
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 short-term bonds are yielding higher. Below we highlight a few money-market ETFs and their performance plus yields.
ETFs in Focus
Federated Hermes Short Duration High Yield ETF (FHYS - Free Report) – Yield 6.66% annually
The fund looks to provide high current income by investing at least 80% of its assets in investments rated below investment grade. The effective duration of the fund’s portfolio will generally be less than 3.0 years. The fund charges 51 bps in fees.
The underlying Fidelity Low Duration Investment Grade Factor Index is designed to optimize the balance of interest rate risk and credit risk such that both returns and risk measures may be improved relative to traditional U.S. investment grade floating rate note indices. The fund charges 15 bps in fees.
The Invesco Ultra Short Duration ETF (Fund) is an actively managed ETF that seeks to provide returns in excess of cash equivalents while also seeking to provide preservation of capital and daily liquidity. The Fund will invest at least 80% of its total assets in fixed income securities of varying maturities, but with an average duration of less than one year. The fund charges 22 bps in fees.
The fund seeks to obtain a high level of current income consistent with preservation of capital. Normally investing at least 80% of assets in investment-grade debt securities (those of medium and high quality) of all types that Fidelity Management & Research Company LLC (FMR) (the Adviser) believes have positive environmental, social and governance (ESG) benefits and repurchase agreements for those securities. The fund charges 20 bps in fees.
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No Rate Cut Until Summer? High-Yield Short-Term Bond ETFs to Buy
Atlanta Fed President Raphael Bostic, a voting member of the Federal Open Market Committee (FOMC), shared insights with CNN in an exclusive interview, as quoted on Yahoo Finance. Bostic revealed his anticipation of the nation's inflation rate, currently at around 3%, dropping to "the lower twos" by the end of 2024. With that outlook, first rate cut could come in summertime, per Bostic.
The aforementioned forecast aligns with his expectation of inflation nearing the Federal Reserve's 2% target. Bostic expressed surprise and satisfaction with the robustness of the labor market. The January jobs report, which saw the addition of 353,000 new jobs, exceeded economists' expectations.
The unemployment rate remained below 4% for the 24th successive month. Bostic indicated that with low unemployment rates, people boosted purchasing power, leading to elevated prices. Following the Fed's first policy meeting of the year, there was a shift in market expectations regarding the timing of interest rate cuts.
Short-Term Rates Have Been Solid Right Now
Despite earlier speculations of rate cuts as early as March, the FOMC emphasized the need for greater confidence in sustained inflation movement towards the target level. Hence, short-term bond yields remained solid lately. Two-month U.S. treasury bond yield was 5.51% on Feb 12, 2024 against 4.17% yield produced by the 10-year U.S. treasury note.
Why Buying Cash-Like ETFs Makes Sense Now
The road ahead in the investing world is a bit unclear. Although the stock market remained at a lofty level, overvaluation concerns remain. The Fed is also unlikely to move fast on policy easing. Plus, we’ll have presidential election this year, which may cause quite an uncertainty.
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 short-term bonds are yielding higher. Below we highlight a few money-market ETFs and their performance plus yields.
ETFs in Focus
Federated Hermes Short Duration High Yield ETF (FHYS - Free Report) – Yield 6.66% annually
The fund looks to provide high current income by investing at least 80% of its assets in investments rated below investment grade. The effective duration of the fund’s portfolio will generally be less than 3.0 years. The fund charges 51 bps in fees.
Fidelity Low Duration Bond Factor ETF (FLDR - Free Report) – Yield 5.37% annually
The underlying Fidelity Low Duration Investment Grade Factor Index is designed to optimize the balance of interest rate risk and credit risk such that both returns and risk measures may be improved relative to traditional U.S. investment grade floating rate note indices. The fund charges 15 bps in fees.
Invesco Ultra Short Duration ETF (GSY - Free Report) – Yield 5.11% annually
The Invesco Ultra Short Duration ETF (Fund) is an actively managed ETF that seeks to provide returns in excess of cash equivalents while also seeking to provide preservation of capital and daily liquidity. The Fund will invest at least 80% of its total assets in fixed income securities of varying maturities, but with an average duration of less than one year. The fund charges 22 bps in fees.
Fidelity Sustainable Low Duration Bond ETF (FSLD - Free Report) – Yield 4.97% annually
The fund seeks to obtain a high level of current income consistent with preservation of capital. Normally investing at least 80% of assets in investment-grade debt securities (those of medium and high quality) of all types that Fidelity Management & Research Company LLC (FMR) (the Adviser) believes have positive environmental, social and governance (ESG) benefits and repurchase agreements for those securities. The fund charges 20 bps in fees.