New data from Freetrade has shown that exchange-traded funds (ETFs) giving exposure to short-term bonds have been some of the most popular destination for savers’ cash recently.
Potential benefits include an attractive yield and relatively safe return, though any investor ought to be aware that dividends can be cut at any time of course.
According to Freetrade, when considering an investment in one of the below ETFs, “you’re typically buying exposure to debt issued by the US government and maturing in under 12 months.
“The likelihood of the US government defaulting on these debts is generally considered close to nil – for good reason, the rate set by the Fed is typically referred to as the “risk free rate” and sets a hurdle for performance above which investors will demand of any riskier asset (like equities).
“Nevertheless, you should be aware that funds like these can be subject to pressures if there’s a sudden dash for cash (like we saw at the start of the pandemic in March 2020).”
Based on the total value of trades from September 2022 to March 2023, here are three of the most popular ETFs for Freetrade’s investors.
iShares $ Treasury Bond 1-3yr UCITS ETF
“This ETF seeks to track the performance of the ICE U.S. Treasury Short Bond Index, which includes U.S. Treasury bonds with maturities between 1 and 3 years. It is denominated in USD and trades on the London Stock Exchange. Performance in 2022 was 8.05% as short-dated bonds rallied and rates rose. Currently it’s yielding 1.86%.”
Invesco US Treasury Bond 1-3 Year UCITS ETF
“This ETF aims to replicate the performance of the Bloomberg Barclays U.S. Treasury 1-3 Year Term Index, which measures the performance of U.S. Treasury bonds with maturities between 1 and 3 years. It is denominated in USD and also trades on the London Stock Exchange. This ETF returned 7.75% in 2022 and is down modestly 1.47% YTD. It’s yielding 2.85%.”
Lyxor Fed Funds US Dollar Cash UCITS ETF
“The Lyxor Fed Funds US Dollar Cash UCITS ETF – Acc seeks to track the Solactive Fed Funds Effective Rate index, which tracks a daily rolling exposure to the Federal Funds Effective Rate, the benchmark short-term money market interest rate in the US. With the US dollar strengthening in 2022, this fund returned a whopping 13.88% (!) but so far in 2023, it’s down a modest 1.86%.”