The Federal Reserve keeping rates steady could be the proverbial calm before the storm of interest rate volatility. That said, fixed income investors can mitigate volatility while still capturing yield in the current rate environment with a pair of active, short-term bond ETFs.
Short-term bonds can be an ideal way for investors to park cash temporarily while attaining a yield that’s more competitive than money market funds. A short-duration or even ultra-short strategy has been in favor during the past few years to mitigate rate risk. It’s also provided investors flexibility in a rising rate environment. Capital markets anticipate the Fed will eventually cut interest rates. So it’s an opportune time to take advantage of short-duration fixed income.
“Bonds with shorter times to maturity are less sensitive to changes in interest rates than longer-term bonds, meaning investors won’t suffer as much if rates head higher,” explained Bankrate.
Given the myriad options available, one worth considering is an ETF with an active management strategy. Specifically, a compelling option is the American Century Short Duration Strategic Income ETF (SDSI ). With an expense ratio of 0.33%, the ETF seeks income. As a secondary objective, it also seeks long-term capital appreciation. The strategy aims to generate attractive yield by investing across multiple fixed income market segments, which maintain a short-duration focus. The fund is deeply diversified, with over 200 bond holdings.
The majority of the fund invests in investment-grade debt. So a focus on quality is apparent in its holdings. Debt holdings may include corporate bonds and notes, government securities, and securities backed by mortgages or other assets.
The active management component of SDSI allows fund managers to maintain pliability in the current fixed income environment. That allows for changes to holdings on the fly if market conditions warrant an adjustment. As of January 31, the 30-day unsubsidized yield is 5.21%, with a 5.34% 12-month distribution rate.
An Additional Active Option
For even more diversification, with over 300 holdings and a low expense ratio of 0.15%, another option is the Avantis Short-Term Fixed Income ETF (AVSF ). Like SDSI, the fund maintains a short-term focus, investing in investment-grade quality debt obligations from a diverse group of U.S. and non-U.S. issuers with shorter maturities.
The fund’s portfolio managers seek bonds with high expected returns through a process that uses an analytical framework, which includes an assessment of each bond’s expected income and capital appreciation. For yield seekers, the fund features a 30-day unsubsidized SEC yield of 4.72% (also as of January 31).
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