Ultra short bonds are fixed-income (debt) securities with durations of less than a year. An ultra short bond fund or ETF invests in a wide range of these ultra short bonds, such as corporate debt and government securities.
Ultra short funds have grown in popularity in the last few years as short-term interest rates have increased to a level not seen in over a decade.
Why you should care:
- Ultra short bond funds and ETFs can offer higher yields than traditional savings accounts or money market funds, helping you maximize your returns.
- Investing in ultra short bond funds provides stability and diversification to your investment portfolio.
- With relatively high liquidity, ultra short bond funds allow easy access to your funds when needed.
What you should know:
- Ultra short bond funds are suitable for preserving capital.
- While they offer higher yields compared to money market funds and brokered CDs, ultra short bond funds still carry risk, including potential loss of principal due to changes in interest rates and market conditions.
- Understanding the fund’s investment strategy, holdings, and expense ratios is essential before investing.
Steps to get started:
- Research and compare different ultra short bond funds based on their historical performance, expense ratios, and risk factors.
- Open an investment account with a reputable brokerage that offers access to ultra short bond funds for easy purchasing and management.
What Are Ultra Short Bond Funds?
Ultra short bond funds are specialized mutual funds that invest in fixed-income instruments with very short-term maturities. Typically, these funds invest in various high-quality bonds, including government and asset-backed securities. The main characteristics of ultra short bond funds are:
- Short-term Maturities: Investments are made in fixed-income securities with extremely short maturities, often less than one year.
- Diverse Investments: They provide exposure to money market instruments and short-term high-quality bonds, such as asset-backed, government bonds, etc.
- Credit Quality: The portfolios generally consist of investment-grade US fixed-income issues, which means a lower risk profile.
Ultra Short Bond Funds vs. Money Market Funds and Other Low-Risk Investments
Ultra short bond funds, money market funds, and certificates of deposit (CDs) are all low-risk and capital preservation investments for investors. However, they each have different levels of risk, return, and investment flexibility.
- Investment Flexibility: Ultra short bond funds have more freedom in investment choices. They generate higher yields by investing in riskier securities, unlike money market funds, which are limited to high-quality, short-term investments.
- Risk and Return Profile: Ultra short bond funds have a higher risk but also the potential for higher returns compared to money market funds and certificates of deposit (CDs).
- Insurance and Guarantees: Unlike CDs which are insured up to $250,000 by the FDIC, ultra short bond funds don’t have such insurance.
Ultra short bond funds have a greater level of investment flexibility by having the liberty to invest in a broader range of securities, including those that are riskier. Money market funds, however, are limited to investing in high-quality, short-term investments such as bonds from the U.S. government, U.S. corporations, and state and local governments.
Because ultra short bond funds invest in riskier securities, they also have the potential for higher returns. The net asset value (NAV) of ultra short bond funds can fluctuate, unlike money market funds which strive to maintain a stable NAV of $1.00 per share.
Finally, ultra short bond funds are not insured by the Federal Deposit Insurance Corporation (FDIC). Certificates of Deposit (CDs) are insured up to $250,000 by the FDIC, ensuring the return of the principal amount along with a specified rate of interest. Ultra short Bond funds and money market funds are not insured by any federal agency, meaning the principal investment is at risk.
However, many ultra short bond ETFs invest a significant portion of assets in U.S. government securities, which are backed by the full faith and credit of the U.S. government. This makes them relatively low-risk.
Credit Quality of Ultra Short Bond Funds
Credit quality measures a bond issuer’s ability to meet its financial obligations, including interest payments and repayment of the principal amount.
The credit quality of ultra short bond funds will be related to the creditworthiness of the bonds they invest in. This depends on each ultra short bond fund’s strategy and the types of bonds it invests in.
Some ultra short bond funds may focus on investing in high-quality bonds, including government and asset-backed bonds, which are considered lower risk. Others might seek higher yields by investing in riskier, lower-quality bonds. Factors such as the issuer’s ability to meet interest payments and repay the principal influence the credit quality of the bonds within an ultra short bond fund’s portfolio.
Examples of Ultra Short Bond ETFs and Funds
Here are some examples of the top ultra short bond ETFs and money market funds:
Ultra Short Bond ETFs
- iShares 1-30 Year Treasury Bond ETF (SGOV) – A fund targeting short-term Treasury bills.
- SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) – Short-term Treasury bill fund.
- iShares Treasury Floating Rate Bond ETF (TFLO) – US Treasury floating rate bond fund.
- WisdomTree Floating Rate Treasury ETF (USFR) – Fund tracking US Treasury floating rate bonds.
- iShares Ultra Short-Term Bond ETF (ICSH) – Invests in short-term bonds to provide income while maintaining low price volatility.
- iShares Short Treasury Bond ETF (SHV) – Short-term US Treasury bond fund.
- SPDR Bloomberg Barclays Investment Grade Floating Rate ETF (FLRN) – Investment grade floating rate bond fund.
- Fidelity Low Duration Bond Factor ETF (FLDR) – Low duration bond fund.
- iShares Floating Rate Bond ETF (FLOT) – Fund investing in floating rate bonds.
- VanEck Investment Grade Floating Rate ETF (FLTR) – Investment grade floating rate bond fund.
Ultra Short Bond Mutual Funds
- Vanguard Ultra Short Term Bond Investor (VUBFX) – Seeks to provide current income while maintaining limited price volatility.
- Morgan Stanley Instl Ultr-Shrt Inc A (MUAIX) – Seeks to provide a high level of income, with a focus on capital preservation.
- BBH Limited Duration N (BBBMX) – Invests primarily in a diversified portfolio of short-term, investment-grade fixed-income securities.
- Pioneer Multi-Asset Ultra Short Income A (MAFRX) – Diversified across short-term bonds, high-yield bonds, and equities for both income and growth.
- Vanguard Ultra Short Bond ETF (VUSB) – Aims to provide current income while maintaining limited price volatility, investing in a diversified portfolio of high-quality and, to a lesser extent, medium-quality fixed-income securities.
FAQ
What are ultra short bond funds?
Ultra short bond funds are a type of mutual fund or exchange-traded fund (ETF) that invests in bonds with very short durations. These funds tend to have average effective maturities of less than one year.
What is the purpose of ultra short bond funds?
The purpose of ultra short bond funds is to provide investors with a relatively stable investment option that generates a higher yield than traditional money market funds, while still maintaining a low level of risk.
What are the differences between ultra short bond funds and other types of bond funds?
The main difference between ultra short bond funds and other types of bond funds is the average effective maturity of the bonds in the portfolio. Ultra short bond funds invest in bonds with very short durations, while other bond funds may have longer average maturities.
How do rt bond funds manage risk and total return potential?
Ultra short bond funds manage risk by investing in high-quality securities and diversifying the portfolio across various issuers and sectors. The total return potential of these funds is influenced by factors such as changes in interest rates, credit risk, and the overall performance of the bond market.
What is credit risk in ultra short bond funds?
Credit risk refers to the possibility that the bond issuer will not be able to make timely interest payments or repay the principal amount when the bond matures. Ultra short bond funds may include corporate bonds, mortgage-backed securities, and other types of fixed-income securities that have varying degrees of credit risk.
How do ultra short bond funds manage interest rate risk?
Ultra short bond funds manage interest rate risk by investing in bonds with short durations. Bonds with short durations are less sensitive to changes in interest rates compared to longer-term bonds.
What is the average effective duration of ultra short bond funds?
Ultra short bond funds typically have average effective durations of less than one year.
How can I find the top-rated ultra short bond funds?
A: To find the top-rated ultra short bond funds, you can use resources like Morningstar. These resources provide ratings and rankings of mutual funds and ETFs based on various factors including past performance, risk, and total return potential.
What should I consider before investing in ultra short bond funds?
Before investing in ultra short bond funds, you should consider factors such as the fund’s expense ratio, its investment strategy, the credit ratings of the bonds in the portfolio, and the fund’s risk and total return potential.
Can I lose money investing in ultra short bond funds?
Like other bond investments, there is a potential for loss in ultra short bond funds. If interest rates rise or if there are adverse changes in credit conditions, the price of the fund may decline, leading to a loss of principal for investors.
What are the best ultra short bond funds in 2024?
The best ultra short bond funds in 2024 would depend on various factors, including market conditions and individual investment objectives. We personally take advantage of floating rate Treasury ETFs such as USFR and TFLO, but we recommend doing research using resources like Morningstar to identify the top-rated ultra short bond funds for the current year.
