3 Things to Look for in Ultrashort-Bond Picks
Investors should assess quality, fees, and risks associated with these funds, which can enhance, but not replace, cash accounts.
Investors should assess quality, fees, and risks associated with these funds, which can enhance, but not replace, cash accounts.
Emory Zink: Beginning in October 2016, the SEC's greater legislation on money markets takes effect. When combined with a low-yielding environment, some investors are looking for alternatives to manage their cash.
Cue the ultrashort-bond category. Open-end funds in the category have doubled in number over the last decade. Many ultrashort-bond funds blend the higher quality and more-liquid bias of money market funds with a sector flexibility that is more similar to short-term bond funds--investing across geographies and in corporate debt and municipals. The average duration of the ultrashort category is a half year.
So, what should investors consider when looking at the options in this category? Three things:
1) Quality. There is a temptation to load up on lower-quality paper when liquidity dries up; in a credit crisis, ultrashort bonds can be hit hard.
2) Fees. Yields are inherently lower at the short end of the curve, and low fees are critical for long-term outperformance.
3) Appropriateness. Most retail investors should recognize that this isn't a replacement for an FDIC-insured bank money market fund or bank CD. There are greater risks with these funds.
Two of our picks in the category include Bronze-rated Fidelity Conservative Income (FCNVX)--a high-quality, lower-volatility fund with broad sector flexibility--and Silver-rated PIMCO Short-Term Institutional (PTSHX)--a fund that manages duration actively and is run by our 2016 Fixed-Income Fund Manager of the year, Jerome Schneider.
Again, this category is not a replacement for a savings account or bank money market fund; but for an investor looking to enhance or diversify a cash strategy, it provides an option.
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