Why This Ultra-Short Bond Fund Is Ultra-Popular 

Keep it simple. Keep it safe. 

Ultra-short-term bond ETFs, which invest in bonds with durations of less than a year, work to do both, providing low risk and high liquidity. Of course, there’s a drawback: A side effect of the strategy is that it caps returns far below those of longer-term funds, historically curbing inflows during periods of stable economic growth. 

Investors, however, have apparently had a change of heart during the spiking volatility of the past 18 months, driven by trade wars, sticky inflation and soaring oil prices due to the US war with Iran. A case in point is the industry’s largest ultra-short bond ETF, which is racing toward the $100 billion mark. If (and more likely when) the iShares 0-3 Month Treasury Bond ETF (SGOV) reaches that milestone, it will be the first in its class to do so, per a report from ETF.com. Unless current market dynamics shift, SGOV is likely to go even higher and could eventually rival the likes of the $160 billion Vanguard Total Bond Market ETF (BND) and iShares’ own $139 billion Core US Aggregate Bond ETF (AGG), both of which have longer durations of more than five years. 

Short’s the Word

Even compared with other ultra-short bond ETFs, SGOV’s holdings are strikingly short-term. It invests exclusively in 0-3 month US Treasury bills and boasts an expense ratio of 0.09%, with yields that track closely to the benchmark Federal Funds Rate, currently 3.50% to 3.75%. 

SGOV’s peer funds are quite a way behind: 

• The next-biggest fund in the category is the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL), per ETF.com, with $46.6 billion in assets and a 0.14% expense ratio.
• The Vanguard 0-3 Month Treasury Bill ETF (VBIL), which launched last year and carries an expense ratio of 0.06%, has already grown to nearly $10 billion.

Not all funds in the category focus on quite such a short timeline. Vanguard’s Ultra-Short Bond ETF (VUSB), for example, is an actively managed fund with a broader mandate, holding both short-term US Treasuries and high-quality corporate bonds with a longer duration of about a year. 

What About Money Market Funds? Ultra-short bond funds are often compared with money market funds, as both appeal to clients seeking investments with steady income and low risk relative to stocks and longer-maturity debt instruments. However, investors should be mindful of the effects of changing interest rates on their performance. 

Generally, money market funds can only invest in securities with maturities of 13 months or less, while the weighted-average maturity of the portfolio must be 60 days or less. The shorter duration of these securities means their prices are less sensitive to changes in interest rates than longer-maturing bond fund prices.