While Direxion Funds eliminated its two-year fixed-income ETFs in November 2010, State Street, AdvisorShares, Vanguard and Pimco are consistent with their short-term, fixed-income ETFs. “There was very little traction in it,” O’Rourke said about Direxion’s Daily Two-Year Treasury Bull 3x Shares (TWOL) and Daily Two-Year Treasury Bear 3x Shares (TWOZ).
Watching The Fed
Vanguard’s Short-Term Bond ETF (BSV) is the largest ETF in its category, with $12 billion in assets invested across corporate and government bonds. It has raked in $4.6 billion over the past 12 months through the end of April, while the Pimco Enhanced Short Maturity Exchange-Traded Fund (MINT), an actively managed ETF with an average maturity of one year, had inflows of $1.2 billion.
“Pimco is doing well, but three-year, fixed-income ETFs are doing better than one-year maturity vehicles because as interest rates fall the one with the longer maturity performs better,” said Morningstar ETF analyst Timothy Strauts. “Because we don’t know what will happen with interest rates, the fixed-income ETF with the best return now is not necessarily the best going forward.”
Unlike other short-term, fixed-income ETFs, BlackRock’s IBCB fund is 100% invested in corporate bonds while most short-term, fixed-income ETFs tend to own government bonds, which are less risky. With steady inflows for the last couple of years, State Street’s SPDR Nuveen Barclays Short Term Municipal Bond ETF (SHM) invests in short-term treasury and municipal bonds for tax-free income and an average maturity of three years. The fund has $2 billion in assets.
Meanwhile, the iShares Barclays 1-3 Year Credit Bond Fund (CSJ) has had $558 million in assets added in the past year compared to SPDR Barclays Capital Short Term Corp Bond ETF (SCPB) ETF’s $1 million in inflows during the same period.
“We've seen a strong affect in the first quarter but the amount of inflows is levelling off in the second quarter," Tucker said. "As long as the Fed is active with quantitative easing and interest rates are kept low, investors will be forced to face the predicament of where to find yield. Investors need to step back and think about the role of fixed income in their portfolio and determine the risk they are willing to take on in order to pick up yield in the market."