During times of economic turmoil or uncertainty, some investors utilize short-term bonds as a way to hedge their exposure during the storm. While these products do not pay out much in terms of yields, the chances of them losing principal are quite minute, something that investors cannot say about other investments. As a result, investors could consider these products a great place to stash cash until attractive investment opportunities present themselves.
Below, we highlight three quality options available in the space that provide amply liquidity and still focus on the short end of the curve [see all the short-term bond ETFs here]:
iShares Barclays 1-3 Year Treasury Bond Fund (SHY)
SHY represents the gold standard for investors seeking exposure to the short-end of the yield curve. SHY targets an index of U.S. Treasury securities that have a remaining maturity of at least one year and less than three years. That exposure keeps the riskiness of SHY to a minimum, but also means that it will typically have a very small yield. However, given the low levels of volatility that this product experiences and its cheap expense ratio, it could make for a nice safe haven for weary traders [read Inflation ETF Special: 25 ETF Ideas To Fight Rising Prices].
iShares Barclays 1-3 Credit Bond Fund (CSJ)
For investors seeking a slightly higher level of risk, and yield, CSJ could make for an interesting choice. The fund tracks the Barclays Capital U.S. 1-3 Year Credit Bond Index which measures the performance of investment grade corporate debt and sovereign, supranational, local authority, and non-U.S. agency bonds that have a remaining maturity of at least one year and less than three years. The product is heavily focused on industrial company bonds as well as those of financial companies.
In addition, the fund also offers decent levels of exposure to supranational bonds– such as those of the European Investment Bank– and agency debt as well. This inclusion of agencies and supranational organizations helps to moderate the risk profile of the fund but can also reduce the overall yield as well [see all the Investment Grade Corporate Bond ETFs here].
SPDR Barclays Short Term Municipal Bond ETF (SHM)
For investors in high tax brackets who have a soft spot for the municipal bond market, this State Street product could be the way to go. The fund tracks an index of short-term muni debt from around the country including state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. Investors who are looking for a municipal choice in short-term funds could consider this product as a safe place to hide during times of economic instability [see Wide World Of Muni Bond ETFs].
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Disclosure: Long CSJ.