There are short duration bonds and corresponding ETFs. For advisors and fixed income investors who really want to minimize interest rate risk, there are ultra-short alternatives. Those products are worth considering this year.
The AB Ultra Short Income ETF (YEAR) is one of the ultra-short ETFs to consider. Actively managed, YEAR turns four years old in September. The $1.47 billion ETF delivers on the ultra-short promise, as highlighted by its effective duration of less than a year.
Home to 183 bonds, YEAR sports a 30-day SEC yield of 3.98%. Yes, that percentage is likely to decline if the macroeconomic environment cooperates, allowing the Federal Reserve to cut interest rates. However, in that scenario, the ETF would likely be a more attractive alternative to high yield savings accounts and money market funds.
“With some level of policy rate cuts expected, many investors are taking a closer look at their portfolio’s cash exposure. Historically, yields on money-market funds and short-term instruments have reacted to Fed cuts in real time, so attempting to time the market can be perilous if those yields tumble,” according to AllianceBernstein research.
More YEAR Perks
Let’s work on the premise that the war in Iran officially ends and inflation declines, potentially setting the stage for rate cuts. That would likely compel some advisors and investors to embrace longer duration bonds and the related ETFs. But rate cuts don’t diminish the appeal of ETFs such as YEAR.
“Even some duration exposure could be an opportunity. Ultrashort bond ETFs may benefit investors as yields start falling, and they don’t have the higher volatility of longer-term bonds. That sets up these strategies as a sound way to shift out of cash while staying relatively conservative,” added AllianceBernstein.
As advisors know, the competition for ETFs like YEAR isn’t long duration Treasury or corporate bond ETFs. Rather, it’s cash. The cash clash could actually work in favor of YEAR over the remainder of 2026, because, as of the end of the first quarter, there was roughly $8 trillion parked in money markets. If Treasury yields turn to the downside, so will yields on money markets, potentially prompting risk-averse investors to consider ultra-short duration bonds and ETFs such as YEAR.
“YEAR is a diversified option for clients seeking attractive income with capital preservation, daily liquidity and duration under one year. It’s a thoughtful, measured step out of cash that offers potentially higher yields with more staying power. As history has shown, ultrashort bond funds have tended to outperform money-market returns in most periods—especially when yields are stable or falling,” concluded the issuer.
Originally published on ETF Trends
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