Keeping it Short With a Treasury ETF

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Investors looking for stability and a little extra income in times of elevated market volatility can consider short-term Treasury exchange traded funds, such as the iShares Short Treasury Bond ETF (NASDAQ: SHV).

SHV tracks the ICE U.S. Treasury Short Bond Index, which is comprised of U.S. Treasury obligations with a maximum remaining term to maturity of 12 months.

“This fund invests in Treasury securities with less than a year remaining until maturity, taking minimal credit and interest-rate risk, which translate to a low yield,” said Morningstar in a note out Friday. “Accordingly, pricing is one of the most important factors driving returns for funds in the ultrashort bond Morningstar Category. This fund enjoys a durable cost advantage over most of its category peers, but there are even cheaper alternatives, which limits the strategy to a Morningstar Analyst Rating of Bronze.”

The $9.49 billion SHV has a 30-day SEC yield of 1.43% and holds 26 bonds. SHV's standard deviation is just 0.13% and its effective duration is 0.44 years. Duration measures a bond's sensitivity to changes in interest rates.

Credit and default risk are not concerns with ETFs like SHV because these funds primarily hold U.S. government debt. Nearly 71% of SHV's holdings carry AAA credit ratings.

“The U.S. Treasury Department issues Treasury securities to fund federal government operations. These bonds have virtually no default risk as the government can raise taxes to repay the debt. Accordingly, Treasury securities offer a very low yield. As of Feb. 1, 2018, the one-year Treasury bond yielded 1.8%, 30 basis points lower than the 20-year average (1998 to 2017). Interest income on Treasury securities is tax-exempt at state and local levels, slightly improving the aftertax yield,” according to Morningstar.

Changes in the yield curve may help explain performance in bond ETFs with varying durations. Specifically, it is possible for short-term interest rates to rise while long-term rates to remain the same or even fall, reflecting a flattening yield curve.

SHV “has offered good downside protection. In fact, the fund had only one money-losing year from its 2008 inception through 2016: 2015, when it declined by 0.01%. The fund's worst downturn over the trailing three- and five-year periods through December 2017 was among the mildest in the category, ranking in the top 20% for both periods,” said Morningstar.

For more information on Fixed-Income ETFs, visit our Fixed-Income category.

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