Interest rate hikes terrify most S&P 500 investors. And for good reason. But ETFs offer a low-risk way to actually make money on them.
The 10 largest ultra-short-term bond ETFs, including iShares Short Treasury Bond, JPMorgan Ultra-Short Income and SPDR Bloomberg Barclays 1-3 Month T-Bill, saw their future-looking yields triple, says an Investor's Business Daily analysis of data from ETF.com, Morningstar Direct, S&P Global Market Intelligence and MarketSmith.
These super-safe ETFs are now paying future yields averaging 2.57%, up from just 0.8% over the past 12 months. It's a jump that turns these ETFs into viable places to hide until the S&P 500 finds its footing. It beats even the roughly 2% yields paid by high-yield savings accounts.
"Ultra-short ETFs are sporting very appealing yields plus come with the liquidity of an ETF," said Todd Rosenbluth, head of research at VettaFi.
What's Driving Up Safe ETF Yields?
Jerome Powell is serious about hiking rates to slow the economy. The Fed already jacked up short-term interest rates four times this year, says Bankrate.com. The Fed took interest rates at the beginning of the year at a range of 0.25% to 0.5% all the way up to a range of 3% to 3.25%.
And it's not done. Most investors expect the target on rates to hit a range of 3.75% to 4% by the Fed's November meeting, says the CME FedWatch tool. And most investors see rates jumping again to a range of 4.25% to 4.5% by the December meeting.
Such rapidly rising rates are toxic for speculative growth stocks. These companies' plans to make money in the distant future are less valuable today. It's costing investors more in lost interest waiting for those future profits to appear.
And that's the draw of ultra short-term bond ETFs. Your yields will rise almost as fast as the Fed can jack up short-term interest rates. "A panicky rates market struggles to price the 'right' amount of peak Fed tightening, driving the whole rates curve higher," according to a Bank of America report.
Where To Find Safe Yield
Most of the bonds that an ultra-short-term bond ETF owns mature in much less than a year. This means even if rates rise more, your yield will soon follow.
Why is that an advantage during a period of rapidly rising rates? iShares Short Treasury Bond sports an average duration of only four months. That means if rates rise, the portfolio will be refreshed with newer, higher yielding bonds in less than half a year. And that's why its yield is now 2.59%, up from 0.4% in the past 12 months.
The Vanguard Total Bond Market ETF, on the other hand, holds bonds with an average duration of 6.7 years. Yes, it yields more: 3.7%. But that will move higher much more slowly than with short-term bond plays.
"With the Fed continuing to raise interest rates, investors are seeking out alternative income opportunities besides investment-grade bond funds like BND," Rosenbluth said.
Word Of Warning: Inflation
There's just one caution though. As tempting as a yield of 2.6% might sound, especially with the S&P 500 down nearly 20% this year, inflation is a factor. Running at nearly 10%, today's sky-high inflation erodes your bond ETF's yields.
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And that why ultra-short-term bond ETFs might be a good place to hide now, but aren't long-term moneymakers. Rosenbluth still thinks high-yield dividend ETFs work for longer term holdings for some inflation protection. SPDR Portfolio S&P 500 High Dividend ETF has a 4.1% yield. Since bond ETFs are traded like stocks, though, you can quickly sell and move your money.
"High-dividend yielding ETFs provide steady income generation but also are tied to stocks that fluctuate," he said.
Most Popular Ultra-Short-Term Bond ETFs
Their ongoing yields doubled from the past 12 months and are expected to rise further
| ETF | Symbol | Assets ($ billions) | Expense ratio | SEC Yield |
|---|---|---|---|---|
| iShares Short Treasury Bond | 22.9 | 0.15% | 2.59% | |
| JPMorgan Ultra-Short Income | 21.8 | 0.18 | 2.88 | |
| SPDR Bloomberg Barclays 1-3 Month T-Bill | 20.8 | 0.14 | 2.19 | |
| BlackRock Ultra Short-Term Bond | 6.8 | 0.08 | 2.73 | |
| iShares 0-3 Month Treasury Bond | 3.8 | 0.05 | 2.16 | |
| Goldman Sachs Access Treasury 0-1 Year | 3.2 | 0.12 | 2.44 | |
| Vanguard Ultra-Short Bond | 2.9 | 0.10 | 3.27 | |
| Invesco Ultra Short Duration | 2.3 | 0.22 | 2.96 | |
| Invesco BulletShares 2022 Corporate Bond | 1.8 | 0.10 | 1.43 | |
| iShares iBonds Dec 2022 Term Corporate | 1.4 | 0.10 | 3.01 |
