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ETF Specialist

An ETF for Those Seeking Safety at the Short End of the Yield Curve

If preserving principal in the near term is an investor’s primary objective, then this fund will likely do the trick.

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 IShares 1-3 Year Treasury Bond (SHY) provides exposure to a portfolio of short-term Treasury bonds and, as of the beginning of April 2016, had an average duration of 1.9 years. Treasury bonds are full faith and credit obligations of the U.S. government and thus carry minimal credit risk. That said, the fund can suffer modest fluctuations in net asset value when short-term rates move sharply and is thus not a perfect substitute for a cash account.

Bond prices have an inverse relationship to interest rates. As a result, if bond yields go up, bond prices go down. SHY's 1.9-year duration implies that if yields on short-term Treasuries rise 1 percentage point, then the value of SHY's portfolio will decline by about 1.9%. In the fourth quarter of 2015, for example, the fund lost 48 basis points as short-term yields increased in anticipation of the Federal Reserve’s December 2015 25-basis-point rate hike, its first in nearly a decade.

Sarah Bush does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.