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Don't Ignore Cash! Up To 3% Yields Now Available On Ultra-Short Term Bonds

Investors can capture a pretty nice dividend yield with relatively little risk.

For as much pain as the bond market has caused investors this year, it has created some decent yield opportunities for those looking to add to positions. It used to be that cash was trash because it yielded literally nothing. As recently as July 2020, even a 10-year Treasury bond yielded just 0.5%. There was income to be found almost nowhere.

The past year has been different. Soaring inflation and a Fed that’s lifted interest rates significantly higher have improved the yield environment quite a bit (although that’s come at the expense of tumbling bond prices). Today, 10-year Treasury yields are at their highest level in 11 years. The 2-year Treasury is at its highest in 15 years.

As I noted on Twitter last week, even money markets now offer (nearly) risk-free 2% yields.

Vanguard & Fidelity Money Market Yields

Vanguard & Fidelity Money Market Yields

While that’s a good start for finally generating some yield on the spare cash in your portfolio, you can actually do better if you’re willing to venture just a bit further out on the risk spectrum. Ultra short-term bonds, which typically come with maturities of less than one year (think T-bills), you can push that 2% yield up to as much as 3%.

The big reason why these ETFs are so advantageous right now is their relatively limited interest rate risk. The majority of ultra-short bond ETFs have durations of 0.5 years or less. That would mean for every 100 basis point increase in interest rates, these funds could be expected to lose about 0.5% in value. That’s not an insignificant consideration since the Fed is expected to continue hiking rates over the next six months, but that pill is easier to swallow when you’re starting off with a much higher yield.

Of the 20 ultra short-term bonds in the ETF Action database, there are plenty of solid choices for investors. A lot of them seem pretty similar on the surface, but there are some differences that should be understood before choosing one ETF over another.

Below is the latest update of my ETF rankings in the ultra short-term bond ETF category followed by five ETFs that I’ll take a little deeper look at.

Ultra Short-Term Bond ETF Rankings

Ultra Short-Term Bond ETF Rankings

BlackRock Ultra Short-Term Bond ETF (ICSH)

30-day SEC yield: 2.71%

Here’s the #1 fund on the list thanks to one of the lowest expense ratios in this group. It’s actually an especially good deal because the fund is actively-managed mixing in a combination of fixed and floating rate notes, including corporates, CDs, commercial paper and a few other odds and ends.

ICSH is unique in that it’s got virtually zero Treasury exposure. That means you’ve got a little more exposure to credit risk. It’s only got a relatively modest 25% BBB-rated debt and that focus on higher rated notes could be especially advantageous if recessionary risks continue to build.

Vanguard Ultra-Short Bond ETF (VUSB)

30-day SEC yield: 3.42%

It’s a little unusual to see a Vanguard ETF not in the top 10 in any particular category, but this is one of the few. VUSB actually comes in at #12, but it does come with the trademark ultra-cheap expense ratio and is the highest yielder of the bunch at 3.4%.

VUSB comes with a duration of 0.9 years though, which means that higher yield comes with higher risk. Like ICSH, it has very little exposure to Treasuries and focuses almost exclusively on corporate issuers. Overall credit quality is slightly below average (although entirely within the investment-grade category), so this is a little more on the higher risk/higher reward end of the spectrum.

iShares 0-3 Month Treasury Bond ETF (SGOV)

30-day SEC yield: 2.19%

If VUSB is on the comparatively more aggressive end of the spectrum, SGOV is on the conservative end. It’s probably about as close as you’ll get to a traditional money market fund in terms of risk and volatility.

As the name suggests, this fund invests solely in ultra low duration Treasury bills. Because those bills have a remaining maturity of just a couple months, it’s among the most stable ETFs you’ll find available. That lack of risk, however, means a lower yield. The 2.2% yield is only a hair above what you’ll see in a money market.

JPMorgan Ultra-Short Income ETF (JPST)

30-day SEC yield: 2.88%

JPST is nearly the biggest ETF in this space and it’s easy to see why. Its active management has produced a 5-star rated portfolio, which consists mostly of short-term corporate bonds, but also a healthy dose of CDs, commercial paper and asset-backed securities.

JPST is perhaps the best combination of quality, yield and controlled interest rate risk. It’s got the vast majority of its portfolio in A-rated debt and better, including 23% of assets in AAA-rated bonds. Despite the high quality tilt and the relatively limited duration of 0.3 years, the fund’s 2.9% yield is attractive.

Goldman Sachs Access Treasury 0-1 Year ETF (GBIL)

30-day SEC yield: 2.44%

GBIL is the slightly longer-term version of SGOV by adding in 3-12 month maturities to the mix. Nearly half of the fund’s assets are in that 0-3 month bucket, so it’s not necessarily a significant step up in risk. You do get a bit of an extra yield boost, however, adding about 25 basis points annually to your pocketbook.

Note: There won’t be an ETF market view this week. The ETF Action database I use for my analytics is undergoing an upgrade, which means I’ll be upgrading some of my reporting as well. The sector level report will be returning very soon!

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