Given the current market environment for bonds, a number of financial advisors are advocating short-term bond options in order to mitigate rate risk. As an alternative to parking cash in the interim, going even shorter via ultra-short bonds is another option.
With the average money market rate hovering between 50 to 65 basis points, investors might be seeking more for their money. They will also need to accept more risk in return — if so, they may want to turn to exchange traded funds (ETFs) that focus on ultra-short bond holdings.
“The picture is brighter for fans of short-term bond mutual funds and exchange-traded funds (ETFs),” a Kiplinger article says. “Instead of being stuck with Treasury bills and puny bank rates, you can join the world of variable-rate corporate and real estate debt, taxable municipal bonds, packages of car loans and credit card bills, revolving equity credit lines, and the occasional soon-to-mature junk bond.”
An Ultra-Short and Active Option
Getting an active management strategy can certainly help with navigating a tricky bond market environment. One ETF option to consider is the T. Rowe Price Ultra Short-Term Bond ETF (TBUX).
TBUX seeks high levels of income that are consistent with low volatility of principal value by investing primarily in investment-grade, short-term securities. Based on the fund’s fact sheet, the fund may purchase debt holdings with a maturity date of up to five years, but overall, the fund’s dollar-weighted average effective maturity will be 1.5 years or less.
In totality, the fund invests in investment-grade corporate and government bonds; this includes mortgage-backed securities, municipal securities, money market securities and bank obligations, and securities from foreign issuers. For the cost-conscious, especially when it comes to making mention of an active fund, the net expense ratio is only 0.17%.
As of January 31, the 30-day SEC standardized yield is at 1.1%. That’s about double what you can get for the current money market rates as long as you’re willing to take on more credit risk.
For more news, information, and strategy, visit the Active ETF Channel.