How's a 5.6% safe return on your cash sound? For a growing number of ETF investors fearful of the S&P 500's future, it's a pretty sweet deal.
Money is pouring into so-called ultra-short bond funds. These ETFs invest in high-quality bonds that usually mature in as little as a month. Their yields are high — roughly triple the S&P 500's dividend yield. Their risk is low. And you don't have to worry about overconcentration of just a few companies like the S&P 500 — as these ETFs own bonds issued by scores of companies and the U.S. government.
"Demand for ultra short actively managed ETFs has been strong in 2024," says Todd Rosenbluth, director of research at Vetta Fi. "Leading ETFs JPMorgan Ultra-Short Income ETF and Pimco Enhanced Short Maturity ETF have gathered approximately $4 billion combined as investors have sought out professional expertise to seek out a cashlike alternative."
Going Long With Ultra-Short Bond ETFs
Bond funds are already on fire — as investors try to get in ahead of lower rates. Bond ETFs took in nearly $150 billion in investors' cash through late July — a record, says the Wall Street Journal. Taxable bond fund inflows account for 90% of all the money coming into all funds in the first half of the year.
But here's one of ultra-short bond funds' biggest tricks: They could actually gain in value if the Federal Reserve cuts short-term interest rates as widely expected, Rosenbluth says. That's in stark contrast with savings and money market accounts, which will simply lower the interest rate they're paying.
"Unlike money market accounts that sport currently appealing yields, these ETFs can benefit when the Fed cuts rates and bond prices rise in value," Rosenbluth said.
Additionally, these ETFs' yields are strong and values stable — even as the Fed leaves short-term rates untouched so far. The 10 largest-by-assets ultra-short bond ETFs are up 0.4% on a price basis this year so far, says ETFDB. That's on top of an average yield of 5.6% paid by the ETFs, says S&P Global Market Intelligence.
Choosing An Ultra-Short-Term Bond ETF
The field for ultra-short-term ETFs is already crowded. And more choice is coming.
SPDR Bloomberg 1-3 Month T-Bill ETF and JPMorgan Ultra-Short Income are the largest ultra-short bond ETFs with $33.3 billion and $24.7 billion in assets, respectively. And others are vying for the market.
Schwab Asset Management, the fifth-largest ETF provider, plans to debut Schwab Ultra-Short Income ETF, by around Aug. 13. "There is room for new entrants," Rosenbluth said. The fund will use human fund managers to actively choose bond investments.
"One key decision is whether to pay a slight premium for active management and have broader access to the fixed income market," Rosenbluth said. "Active ETFs look beyond Treasury bills."
It's also important to pay attention to fees, too. Fees can eat a large portion of bond fund returns. JPMorgan Ultra-Short Income charges 0.18% annually. And the new Schwab ultra short bond fund will charge 0.14%.
But much of these bond funds' future returns hinge on what the Fed does with short-term interest rates. "There remains uncertainty about how aggressive the Fed will be in cutting rates, and investors do not want to get caught in the higher-for-longer environment," Rosenbluth said.
Largest Ultra-Short Bond ETFs
By assets
| ETF | Symbol | Assets ($ billions) | Yield |
|---|---|---|---|
| SPDR Bloomberg 1-3 Month T-Bill | 33.3 | 5.22% | |
| JPMorgan Ultra-Short Income | 24.7 | 5.21 | |
| iShares 0-3 Month Treasury Bond | 23.9 | 5.20 | |
| iShares Short Treasury Bond | 19.2 | 5.12 | |
| PGIM Ultra Short Bond | 7.3 | 5.71 | |
| iShares Treasury Floating Rate Bond | 7.2 | 5.29 | |
| SPDR Blackstone Senior Loan | 7 | 8.99 | |
| BlackRock Ultra Short-Term Bond | 5.5 | 5.23 | |
| Goldman Sachs Access Treasury 0-1 Year | 5.3 | 5.09 | |
| Vanguard Ultra-Short Bond | 4.4 | 5.03 |
