With everything that happened in the fixed income markets this past year, one theme dominated the headlines, the ETF flows, and the stories on this very blog: Short duration bonds. Through the end of 2013 $34 billion flowed into short duration bond ETFs (source: Bloomberg).
As I discussed in a recent post, investors flooded into the short duration category for two distinct reasons. First, many were rotating out of longer duration bonds, thereby lowering interest rate risk in a rising rate environment. Second, others used these bonds to toe-dip back into the market and out of cash, which is currently earning negative real returns after inflation.
ETFs have been a popular choice for investors executing both of these strategies. Because there’s a large variety of bond ETFs out there, it’s easy to customize your short duration exposure using only one or two funds. And with the recent launch of the iShares Liquidity Income ETF (ICSH), investors have another intriguing tool at their disposal.
ICSH has a very low duration (0.36 as of 1/2/13), making it one of the least interest rate sensitive funds in the iShares bond line-up. You can see how ICSH compares to the rest of the iShares short duration bond suite below:
ICSH seeks to provide income while preserving capital by investing in short term bonds and money market instruments. This makes it a natural solution for investors looking to execute the “step out of cash” strategy I mentioned above. Compared to SHV (iShares Short Treasury Bond ETF), which has the closest duration, ICSH yields 0.58% while SHV yields 0.13%.1