when the Fed revealed its intentions of withdrawing support from the market.
As expected, the Fed started trimming and will finally be winding up its bond buying program this October. A healthy labor market and accelerating momentum in the manufacturing and service industries have raised speculations of a sooner-than-expected rate hike, though the recently flat U.S. retail sales for July have again bolstered expectations that the Fed would delay a rate hike.
This uneven economic recovery is not confined to the U.S. alone. Global economic recovery has also been quite slow and fragile this year. Japan’s annualized GDP shrank 6.8% on an annualized basis in the April-June quarter, while China is also showing signs of an uncertain recovery. Moreover, Europe is struggling from a mix of internal and external factors, with Italy back in recession, France almost stagnant and Germany losing momentum.
Apart from the economic worries, we are saddled with a host of geopolitical risks this year emanating from Ukraine, Iraq and Gaza.
The rising market turmoil is clearly reflected in the actions of the bond market. Investors are curtailing risk in their portfolios and are as such fleeing from the junk bond space to find safety in the Treasury bond and the investment grade corporate bond space (read: High Yield Bond ETFs See Huge Outflow, Where to Go?).
The pull out from these bonds also stems from concerns over rising interest rates which will erode the value of current bond holdings. ‘‘The risk-reward trade-off is not that attractive anymore,’’ says Collin Martin, with the Schwab Center for Financial Research. Moreover, concerns have built up lately over lofty valuations in riskier assets such as junk bonds and lower rated corporate bonds.
Given the current market turmoil, U.S. Treasury bonds have remained in the top spot for investors among the list of global safe havens.
As such, investors would be better off investing in short-term treasury bonds and ultra short investment grade corporate securities that are usually considered safe by investors during such volatile times.
iShares 1-3 Year Treasury Bond ETF (SHY)
Treasury bonds are quite popular this year due to heightened global uncertainty. The fund is the most popular ETF in the government bond space with an asset base of $9 billion and good liquidity with an average trading volume of more than one million shares a day.
The fund tracks the Barclays U.S. 1-3 Year Treasury Bond Index, focusing on 75 U.S. Treasury bonds with remaining maturities between one and three years. SHY focuses on the short end of the yield curve with weighted average maturity of 1.94 years. The interest rate risk is also lower for this fund reflected by an effective duration of 1.91 years.
SHY charges 15 basis points as fees and has a 30 Day SEC Yield of 0.35% (see all Government Bond ETFs here).
Schwab Short-Term U.S. Treasury ETF (SCHO)
The fund also tracks the Barclays U.S. 1-3 Year Treasury Bond Index holding 54 stocks in the basket. The weighted average maturity for the fund stands at 0.53 years, while the effective duration is 0.49 years. The 30-day SEC yield for the fund stands at 0.48%.
The fund has amassed $566.9 million since inception and sees moderate average trading volume of 78,000 shares a day. The product is quite cheap as it charges just eight basis points as annual fees.
PIMCO Enhanced Short Maturity Strategy Fund (MINT)
MINT uses an active approach and focuses on short-duration American securities that are ultra-safe. The fund has an effective duration of 0.49 years and average maturity of 0.53 years. Additionally, the 30-day SEC yield stands at just 0.48%, while the estimated yield-to-maturity comes in at 1.05%.
The fund holds a diversified basket of 625 investment grade bonds. The fund is quite popular in its space with an asset base of $3.8 billion and an average trading volume of more than 250,000 shares a day.
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