6 money market ETFs to buy for safety

Short-term, investment-grade, fixed-income assets can help protect your capital.

  • By Tony Dong,
  • U.S. News & World Report
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Stocks and bonds have dropped in tandem throughout 2022 as markets priced in a series of anticipated 50-basis-point interest rate increases. Year to date through May 16, the SPDR S&P 500 ETF Trust (SPY) and iShares 20+ Year Treasury Bond ETF (TLT) are down 16% and 21%, respectively. To preserve capital amid volatile market conditions, investors have increasingly turned to money market instruments to ensure safety of principal. These instruments hold short-duration (less than one year), top-rated AAA debt, rendering them virtually immune to interest rate and default risk. As a nearly "risk-free" asset, money market instruments are often regarded as cash equivalents. Well known examples include U.S. government Treasury bills, or T-bills, and certificates of deposit, or CDs. Here is a list of six low-cost money market exchange-traded funds, or ETFs, to buy in 2022.

SPDR Bloomberg 1-3 Month T-Bill ETF

BIL (BIL) tracks the performance of the Bloomberg 1-3 Month U.S. Treasury Bill Index and holds zero-coupon U.S. Treasury securities that have a remaining maturity of one-to-three months. The ETF holds 100% AAA-rated government debt, making it extremely resilient to liquidity risk, credit risk and default risk. The ETF has a yield to maturity, or YTM, of 0.65%, which is the average rate of return anticipated on the underlying bonds if they were to be held to their maturity date. BIL is also virtually immune to interest rate risk, with a very low effective duration of 0.13 years. This means if interest rates increase by 1%, the price of BIL will only fall by 0.13% on average. Holding BIL will cost an expense ratio of 0.13%.

iShares Short Treasury Bond ETF

Investors looking for higher yields at the cost of slightly higher interest rate risk can go up the ladder in duration by buying SHV (SHV). SHV tracks an index composed of U.S. Treasury bonds with remaining maturities of one year or less. This gives SHV a higher effective duration of 0.35 years. If interest rates rise by 1%, SHV would lose around 0.35%, making it more volatile than BIL. In exchange, SHV has a higher yield to maturity of 1.12%, giving better income potential compared to BIL. Like BIL, SHV's underlying holdings are also AAA-rated U.S. government debt with virtually no liquidity, credit or default risk. Buying SHV will cost an expense ratio of 0.15%.

iShares 0-3 Month Treasury Bond

SGOV (SGOV) holds Treasury bills from the shortest end of the yield curve, tracking the ICE 0-3 Month US Treasury Securities Index. Compared to BIL, SGOV is even more insulated from interest rate risk, with a very low effective duration of just 0.09 years. This means that if interest rates rise by 1%, SGOV can be expected to lose just 0.09% in value, making it a great choice for reducing volatility in a portfolio compared with holding cash. Surprisingly, SGOV also has a similar average yield to maturity as BIL of 0.68% despite being shorter in effective duration. Best of all, SGOV's expense ratio has been partially waived, to 0.03% from 0.12% through at least June 30, 2022.

Invesco Ultra Short Duration ETF

Unlike the previous ETFs, GSY (GSY) is actively managed, with Invesco's fund manager attempting to provide returns higher than cash equivalents while balancing preservation of capital and daily liquidity. Compared to BIL, SHV and SGOV, GSY also contains a variety of investment-grade corporate debt and foreign government bonds. Most of the fund is made up of fixed-income assets with maturities of a year or less, with an average effective duration of 0.71 years. Compared to the previous options, GSY takes on more interest rate risk, making its movements slightly more volatile. However, the trade-off here is a significant increase in yield to maturity at 2.11%. Holding GSY will cost an expense ratio of 0.22%.

Goldman Sachs Access Treasury 0-1 Year ETF

GBIL (GBIL) provides access to an array of U.S. Treasurys with a remaining maturity of one year or less. The ETF is passively managed, tracking the performance of the FTSE US Treasury 0-1 Year Composite Select Index. In terms of composition, 46% of the ETF consists of Treasurys with three months or less remaining until maturity, 34% with three-to-six months remaining, 10% with six-to-nine months remaining and 9% with between nine and 12 months remaining. This nets out to an effective duration of 0.33 years and weighted average yield to maturity of 1.05%, giving GBIL a similar risk/return profile as SHV. However, GBIL is slightly cheaper than SHV, with a net expense ratio of 0.12%.

SPDR SSGA Ultra Short Term Bond ETF

ULST (ULST) tracks the Bloomberg US Treasury Bellwether 3 Month Index, made up of Treasurys with three months until maturity. The ETF is actively managed by State Street's Fundamental Active Fixed Income Team, with the goal of generating a better total return compared to holding cash in high-interest savings accounts or CDs. Compared to its cousin BIL, ULST has a higher effective duration of 0.21 years, making it more sensitive to interest rate risk. In return, it offers a much higher yield to maturity of 2.29%, which may make it more desirable as a holding for income-oriented investors seeking a margin of safety. Buying ULST will cost an expense ratio of 0.2%.

FICS Editors’ Note: This story has been edited and condensed from its original version published at www.usnews.com.

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