As short-term bond yields continue to rise, short-term bond fund ETFs may be an appropriate addition to an individual’s long-term investing strategy.
Short-term bond ETFs invest primarily in investment grade corporate fixed-income investment vehicles with maturities between one and five years.
In general, these ETFs are suitable for conservative investors because they are less sensitive to changes in interest rates than bonds with longer maturities.
As interest rates rise, long bonds could suffer price declines that make holding them less attractive, especially if inflation heats up unexpectedly.
Short bonds have paid extremely low rates in the past few years, but that is beginning to change.
Each bond ETF seeks to replicate the composition of various standardized fixed income indexes such as the Barclays 2020 Maturity Corporate Index, which measures the performance of US dollar-denominated, taxable, investment-grade corporate bond securities maturing between April 2019 and May 2020.
The following are the top three short-term passively managed ETFs out of a total of 25 funds based on criterion established by US News and World Report.
The highest-ranked funds are evaluated on several factors, the most important of which include an assessment of the funds expense ratio, the diversification of its holdings and its tracking error, which is an indication of whether the ETF is actually replicates the performance of its underlying index.
iShares 0-5 Investment Grade Corp ETF (SLQD)
This ETF receives a score of 8.8 with costs, portfolio diversification and tracking error components all receiving excellent ratings. The fund seeks to track the investment results of the Markit iBoxx USD Liquid Investment Grade 0-5 Index that reflects the performance of U.S. dollar-denominated, investment-grade corporate bonds with maturities of less than five years.
The fund generally will invest at least 90% of its assets in the component securities of the underlying index and may invest up to 10% of its assets in certain derivatives, cash and cash equivalents.
iShares iBonds Dec 2019 Term Corp ETF (IBDK)
This fund received an overall score of 6.9 with costs and holdings diversity ranked excellent and tracking error rated as good. iBonds tracks the the Bloomberg Barclays December 2019 Maturity Corporate Index composed of investment-grade corporate bonds maturing in 2019.
The fund conscientiously tracks the benchmark by investing at least 90% of its assets in the constituent bonds of the underlying index. The fund is non-diversified.
iShares 1-3 Year Credit Bond ETF (CSJ)
CSJ also received an overall score of 6.9. This fund ranks excellent for each of the three categories of costs, diversification and tracking error. The fund seeks to track the investment results of the Bloomberg Barclays U.S. 1-3 Year Credit Bond Index that measures the performance of high-grade corporate, as well as sovereign, supranational, local authority and non-U.S. agency bonds.
CSJ generally invests at least 90% of its assets under management in fixed income vehicles of the underlying index. The fund’s investments have a remaining maturity of one to three years.