Trimming Portfolio Duration With Short-Term Bond ETFs

In the wake of Donald Trump's shocking victory in last week's presidential election, there has been ample speculation that the Federal Reserve will not proceed with hiking interest rates next month. Ten-year Treasury yields are telling a different story.

Including Monday's jump of almost 5 percent, yields on the benchmark U.S. government bond have climbed nearly 22 percent in just the past five trading sessions, indicating that fixed income markets believe the Federal Reserve is still on pace to boost borrowing costs and that such a move is imminent.

While longer-date fixed income exchange-traded funds have been pinched in recent sessions, there are plenty of low duration alternatives for investors to consider.

Other Options

“In analyzing fixed income ETFs from a holdings perspective, we assess the duration, credit quality and yield of an ETF. This is combined with expense ratio, bid/ask spread and liquidity to form our three-tiered ranking. The ETF's three-year track record is not used since especially in the bond market, past performance is tied to how the ETF was positioned during a different fixed-income environment,” said CFRA Research in a note out Monday.

The research firm said, in its coverage universe, there are 27 bond ETFs with durations of three years or less it rates overweight.

One of the most popular options for investors looking for a low-risk idea among low-duration bond ETFs is the iShares Barclays 1-3 Year Treasry Bnd Fd SHY. The $11.4 billion SHY has an effective duration of just under 1.9 years and features only U.S. government debt, ensuring that credit risk is not an issue for this fund.

For investors willing to accept some credit risk while garnering a more alluring yield, there is the SPDR Series Trust SJNK. SJNK, arguably the dominant name among short-term high-yield corporate bond ETFs, has a modified adjusted duration of about 2.4 years, well below the average duration found on traditional junk bond ETFs. SJNK has a 30-day SEC yield of almost 5.7 percent.

SJNK Vs. SHY

“Not surprisingly, the bonds inside SJNK incur more credit risk than SHY with speculative-grade bonds. For example, SJNK recently held 44 percent in bonds rated BB and 30 percent in bonds rated B. The ETF trades on average 1.9 million shares on a daily basis, also for a penny spread, but has a higher 0.40 percent expense ratio,” noted CFRA.

CFRA has Overweight ratings on SHY and SJNK.