It’s a Good Time to Consider Short Duration Bond ETFs

Ten-year Treasury yields closed at 4.57% on May 21 and have roughly tripled over the past five years. Making matters worse for investors evaluating longer-dated bonds and the related ETFs, is that the Iran war has sent energy prices soaring, along with inflation. Of course this has all left the Federal Reserve with little room to lower interest rates this year.

Add it all up and short duration bonds and ETFs such as the JPMorgan Short Duration Core Plus ETF (JSCP) may be fixed income investors’ best friends this year. The importance of ETFs like JSCP is amplified not only because of the Fed’s interest rate predicament, but also because cash yields are declining. Said another way, the yields on high-yield savings accounts aren’t as impressive as they were two or three years ago.

For its part, the actively managed JSCP, which turned five years old in March and is home to $1.45 billion in assets under management, sports a 30-day SEC yield of 4.49% as of April 30. That’s impressive when considering investors embracing this ETF take on minimal credit risk.

Active Management Matters

Many advisors and fixed income investors turn to short duration bond ETFs as cash alternatives and/or to mitigate interest rate risk, but they still need to be selective in this part of the bond market. That is to say, active management can be beneficial with short duration products like JSCP.

“The track record is clear: actively managed short duration ETFs have outperformed cash over the past three years, despite significant interest rate volatility and deeply inverted yield curves,” noted J.P Morgan Asset Management. “The combination of higher starting yields and lower duration risk helped drive these results, and the setup going forward is even more favorable. With cash yields having fallen 175 basis points and yield curves having steepened, the tailwind for outperformance is even stronger.”

As JSCP’s issuer points out, short duration isn’t a corner of the bond market where investors can buy in and stop monitoring what’s going on. Likewise, many of the passive products in this space are too dependent on U.S. government debt and high-grade corporates, meaning those funds’ indexes are missing out on credit and income opportunities.

“By moving beyond benchmark constraints, active portfolios can access off-the-run bonds, specific securitized tranches, and maturity buckets with superior risk-reward profiles. They also have the flexibility to adjust positioning throughout the market cycle — reallocating across sectors, ratings, and issuers as conditions evolve to capture opportunities and mitigate drawdowns,” added J.P. Morgan.

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