The new year brings with it a regime shift in policies and regulations that will impact the economy and markets. Short- and ultra-short duration bonds offer opportunity for income investors who want to position for potential volatility or uncertainty heading into 2025. The KraneShares Sustainable Ultra Short Duration Index ETF (KCSH ) offers a diversified portfolio within short-duration due to the screens its strategy employs.
Money markets proved a lucrative hedge for investors in the last few years, as market volatility spiked and interest rates rose. Now, with rates on the decline, investors are moving out of cash and into short-duration bonds. This class of bonds offers low duration risk while still generating notable yields.
KCSH is a fund worth consideration, given the diversification it brings to existing short-duration exposures. The fund seeks to track the Solactive ISS Sustainable Select 0-1 Year USD Corporate IG Index, which measures the performance of investment-grade corporate bonds with maturities up to one year.
Invest in Lower Risk Bonds Without Sacrificing Yields
Investment-grade bonds offer a historically lower risk of default compared to noninvestment-grade bonds. IG bonds also offer the potential for reliable yields for investors. This is generally an attractive quality during periods of pronounced, ongoing market volatility. The bonds are U.S. dollar-denominated, and the strategy seeks to offer similar credit and interest rate risk as ultra-short duration IG bond benchmarks.
The strategy also strives to generate yields and a risk premium over that of Treasuries as well as money markets. The fund offers a 4.56% 30-day SEC yield, as of November 11, 2024. KCSH goes one step further in screening for those issuers that align with the Paris Agreement. It includes climate analysis by Institutional Shareholder Services in its security selection screen.
This means companies whose bonds are included must work to curtail global emissions to 1.5 degrees Celsius by 2050. Issuers must demonstrate self-decarbonization of 7% or greater each year before their inclusion in the portfolio. The strategy also excludes issuers whose revenues are derived from fossil fuels and other sources.
This added lens creates a diversified portfolio within the space, making the fund a notable complement to existing ultra-short duration exposures. KCSH has an operating expense of 0.20% with fee waivers that end August 1, 2025.
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