As the economic situation continues to worsen, many investors have been running for the exits in the equity market. Concerns over an economic slowdown in America have combined with credit worries in a number of major European economies, not to mention inflation prospects in emerging markets, to push many into safe haven investments across the board. While gold is an ever popular choice, the fact that the precious metal is at all-time highs and is quickly approaching $2,000/oz. is disconcerting to many investors. Furthermore, a continued influx into U.S. dollars, brought about by further turmoil overseas, a very real possibility given the high levels of risk in the market, could cause a short-term decline in the price of gold and hurt those who bought the metal on hopes of making a defensive play.
Thanks to this, some investors have piled into short-term bonds as a way to hedge their exposure during the storm. While these products do not pay out much in terms of yields, the chances of them losing principal are virtually nothing in this environment, something that investors cannot say about gold. As a result, investors could consider these products a great place to stash cash until attractive investment opportunities present themselves. Luckily for those seeking this form of investment, a number of choices are out there that allow traders to buy up low duration securities that can withstand current market turmoil as well as payout a nominal yield to boot. Below, we highlight three quality options available in the space that provide amply liquidity and still focus on the short end of the curve [see all the short-term bond ETFs here]:
iShares Barclays 1-3 Year Treasury Bond Fund (NYSE:SHY)
SHY represents the gold standard for investors seeking exposure to the short-end of the yield curve. The fund has close to $8.6 billion in assets under management and trades more than 1.5 million shares a day, suggesting that there is ample liquidity to provide tight bid ask spreads for even the largest of investors. SHY targets an index of U.S. Treasury securities that have a remaining maturity of at least one year and less than three years, with the vast majority of the fund going to securities maturing in 2013. This gives the fund an effective duration of just 1.8 years and a similar level for weighted average maturity as well. Despite these positives, investors should note that the product pays a paltry yield of just 0.2%, meaning that investors should definately not seek to get the majority of their bond exposure from this holding. However, given the low levels of volatility that this product experiences, and the fact that the fund has an expense ratio of just 15 basis points, it could make for a nice safe haven for weary traders [read Inflation ETF Special: 25 ETF Ideas To Fight Rising Prices].
iShares Barclays 1-3 Credit Bond Fund (NYSE:CSJ)
For investors seeking a slightly higher level of risk, and yield, CSJ could make for an interesting choice. The fund tracks the Barclays Capital U.S. 1-3 Year Credit Bond Index which measures the performance of investment grade corporate debt and sovereign, supranational, local authority, and non-U.S. agency bonds that have a remaining maturity of at least one year and less than three years. The product is heavily focused on industrial company bonds as well as those of financial companies; these two sectors combine to make up close to 70% of the total assets. In addition, the fund also offers decent levels of exposure to supranational bonds– such as those of the European Investment Bank– and agency debt as well. This inclusion of agencies and supranational organizations helps to moderate the risk profile of the fund but can also reduce the overall yield as well.
Nevertheless, CSJ still has an effective duration and a weighted average maturity of less than two years, not to mention a standard deviation less than 3.6%, suggesting that no matter what happens in the broader markets, this fund looks to be pretty stable. Investors should also note that although this product charges a slightly higher expense ratio of 20 basis points, the yield is close to 1.1%. While this isn’t a great deal of current income, it is more than enough to hold investors over until market conditions improve or bottom out [see all the Investment Grade Corporate Bond ETFs here].
SPDR Barclays Short Term Municipal Bond ETF (NYSE:SHM)
For investors in high tax brackets who have a soft spot for the municipal bond market, this State Street product could be the way to go. The fund tracks an index of short-term muni debt from around the country including state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. This has proven to be pretty popular with investors as the product has $1.3 billion in AUM and trades close to 275,000 shares per day. The fund has a slightly higher modified adjusted duration than the other two products on the list– 2.9 years– but the product also has far more holdings at 325 individual securities. Top state allocations include; New York, California, Texas, Connecticut, and Florida, suggesting that the fund is pretty well spread out from a geographic perspective with large chunks coming from around the nation. While the fund may be diversified, it doesn’t offer much in terms of risk, holding only the top rated securities in the country, or those rated at least AA. Thanks to this, SHM pays out investors a yield of about 0.75% or 1.15% on a tax adjusted basis for those in the top tax brackets. Given this this fund also charges investors 20 basis points in fees, those who are looking for a municipal choice in short-term funds could consider this product as a safe place to hide until the storm passes over the market and more long term choices are suitable [see Wide World Of Muni Bond ETFs].
Written By Eric Dutram From ETF Database Disclosure: Long gold bullion, IAU, and CSJ.
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