With 10-year Treasury yields too high for many investors’ comfort and with the Federal Reserve potentially boxed into a corner of not cutting interest rates this year, advisors and fixed income investors are revisiting short duration bonds and the related ETFs.
So now is an opportune time to examine the American Century Short Duration Strategic Income ETF (SDSI ). The actively managed SDSI, which turns four years old in October, attempts to beat the widely followed Bloomberg U.S. 1-3 Year Government/Credit Bond. Home to 416 bonds, SDSI makes good on the short duration promise as its option adjusted duration is just 2.12 years. Indeed, this ETF offers advisors and investors some perks.
“The main advantage of short-term bonds is their ability to generate current income with relatively low risk. For this reason, short-term bonds can be a good choice for many investors’ portfolios,” noted Amy Arnott of Morningstar.
More SDSI Benefits
While interest rate risk is typically benign with ETFs like SDSI, investors still need to be mindful of credit risk. Fortunately, the American Century ETF, which has a weighted average coupon of 5.17%, leans heavily into high-quality fare. More than 18% of its lineup is allocated to U.S. government debt, and another 27% of its holdings are rated AAA, AA or A.
Another advantage offered by short duration and ETFs such as SDSI: When rates rise and bond prices decline, the losses are usually less severe for lower duration fare.
“In practice, this means that short-term bonds have generated relatively low returns—but they also court less volatility than any other asset class except cash,” added Arnott.
Speaking of cash, yields on even the highest-yielding savings accounts are currently declining, potentially enhancing the allure of ETFs like SDSI. On the yield front, the American Century ETF sports a 30-day SEC yield of 4.86%, which is highly appealing relative to cash instruments. Plus, short duration bonds offer some upside potential — something that doesn’t accompany cash.
ETFs such as SDSI are also pertinent to retirees using their portfolios for living expenses, who need low-risk income and liquidity.
“Investors who already own an intermediate-term core bond fund might wonder why they should bother with a separate short-term fund. The main reason is that short-term bonds function better as a source of liquidity for investors who are actively spending from their portfolios,” added Arnott.
SDSI’s annual expense ratio is 0.32%, or $32 on a $10,000 investment.
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