With the Fed deciding to delay tapering at their last meeting,
it looks like the rise in interest rates that many investors have
been fearing won't happen quite yet. Eventually, as the Fed
slows down and ultimately stops their bond-buying program and
begins to increase the Federal Funds Rate, we will likely see
higher interest rates. But for now, the timing of these
events has been pushed out.
Despite this recent news, we still see a lot of people focused
on investments with low levels of
, a common measure of interest rate sensitivity. This has
in fixed income ETF and mutual fund flows this year, and is
likely to continue until we see higher interest rates. The
idea is to invest in funds that will be less impacted by a rise
in interest rates, whenever that will occur.
iShares recently listed a new fund that is aimed at just these
is the ticker of the iShares Short Maturity Bond ETF. The
fund invests in a diversified portfolio of short maturity fixed
income securities such as government bonds, corporate bonds,
asset-backed securities, and mortgage-backed securities. It may
also invest in commercial mortgage-backed securities. With
a typical duration of around one year, the fund's interest rate
sensitivity should stay low. The fund will also try to
produce income and will invest at least 80% of its net assets in
investment grade securities. Here is a snapshot of the
Source: BlackRock as of 10/2/2013
Credit ratings displayed are from
as of 10/2/2013.
People who follow our other fixed income iShares ETFs will
notice that this fund is a little different. Our other bond
funds seek to track indexes that each provide precise exposure to
a specific segment of the market, such as 1-3 year Treasuries or
emerging market bonds. NEAR is an actively managed, multi-sector
fund where a portfolio manager is deciding what to put in the
fund and how to reposition it on a regular basis. It is
still providing exposure to a specific part of the market - in
this case short maturity fixed income securities - but the
composition of the fund will shift over time according to the
opportunities that the portfolio manager sees.
So how can investors use a fund like NEAR? There are a
couple of likely applications. The first is to seek to
reduce interest rate sensitivity in an investor's
portfolio. NEAR's diversified multi-sector exposure likely
makes it a good candidate to serve as a core short duration
investment. It should provide a balance between interest
rate sensitivity (with a duration of around 1 year) and yield
(with an average yield to maturity of just over 1%).
The other common application I expect to see is investors
using NEAR as part of a cash laddering strategy. Many
investors want to keep a portion of their portfolio in money
market funds,* but are not pleased with the yields they are
getting in today's market.
shows that the average yield for a money market fund today is one
basis point - that's 1/100
of 1%. Of course, the advantage of a money market fund is
that it seeks a stable value, so even though you are not earning
much money you may be taking on less risk.
The idea of a cash laddering strategy is to split an
investment between a money market fund and a potentially higher
yielding fund. A hypothetical 75%/25% money market/NEAR
allocation currently provides a yield to maturity of 0.25% while
only taking on .25 years of duration. The NEAR investment
does not have a stable value and its price will move around in
response to changes in yields and market conditions, but may
provide a pick-up in yield relative to a money market fund.*
Investors can customize the allocation of each fund to find the
appropriate balance of safety and yield that works for their
So is this a NEAR-term opportunity? It might be, for
those investors who are looking to reduce their portfolio's
exposure to interest rate risk, or for those who are looking to
invest some of their cash back into the market. Investors
now have a new building block that they can use to create the
right portfolio for them.
*Know the Differences
Money Market Funds
- A type of mutual fund that invests in high quality
short-term debt and pay dividends that generally reflect
short-term interest rates.
- Seek to maintain a stable value called a "net asset value"
or NAV of $1.00 per share.
- Often used by investors to park cash, or as an alternative
to investing in the stock market.
- Considered to be fairly safe investments, however do have
risks and fees. While a fund's managers try to keep the NAV
stable, the yield changes over time. These changes generally
reflect short-term interest rates.
Actively Managed ETFs
- Funds that trade on exchanges intraday at the current
market price, which may differ from net asset value.
- Fees consist of an expense ratio and applicable transaction
or brokerage costs.
- Hold baskets of securities.
- Actively managed; manager seeks to outperform underlying
Matt Tucker, CFA, is the iShares Head of Fixed Income
Strategy and a regular contributor to
. You can find more of his posts