Looking for the right short-term bond ETF? It may be a better use of one’s time than trying to read the tea leaves and divine the Fed’s true plans for the terminal Fed funds rate. Whichever rate the Fed decides will bring inflation down enough to meet its standards, a short-term bond ETF as categorized by VettaFi, like the , should be on investors’ shortlists in the weeks ahead.
Why? Consider its use of floating rate Treasurys (FRNs), having launched just weeks after the first FRNs arrived on the market more than eight years ago. USFR goes for FRNs with a two-year term, with an issue date on or before the index rebalancing date. FRNs reset their coupon rate weekly based on the most recent 90-day T-bill auction, with the index USFR tracks rebalanced on the last business day of each month.
Its floating rate approach makes it a relatively safe place to park cash, with the benefit of higher average interest rate amounts than T-bills or other Treasury bonds offered at the end of last month, for example, with an average interest rate amount at 4.4%.
The case for USFR grows when looking at its net inflows of late, adding $992 million over one month and $3.4 billion over the last three months. Charging 15 basis points, the strategy has also outperformed its ETF Database Category Average over one month by 48 basis points.
In fact, it has seen $953 million in four-week net inflows, more than any other short-term bond ETF as categorized by VettaFi and ahead of other rival strategies.
Should Treasury yields rise, then FRN investors may be able to earn better returns – and with the Fed set to raise rates and perhaps go even further than a 5% terminal rate, they could prove to be an attractive offering.
With stocks in the U.S. still highly priced and with room to drop if the Fed does induce a recession, bonds can certainly play a big role in investors’ portfolios. For those investors looking for the right bond exposures to serve that goal and offer yields while stocks may struggle, USFR is certainly a short-term bond ETF to watch.
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