How to Deploy Short-Term Bonds in Portfolios

Short-term bonds are generally defined as debt with maturities of one to three years. Additionally, these bonds come in a variety of forms, including Treasuries.

As such, there are dozens of exchange traded funds addressing this corner of the bond market, including the BondBloxx Bloomberg Two Year Target Duration US Treasury ETF (XTWO). XTWO follows an index comprised of U.S. government debt with an average duration of about two years.

Owing to its status as a Treasury ETF, XTWO features low credit risk. And because its duration hovers around two years, the fund isn’t highly sensitive to changes in interest rates. However, neither point implies reduced levels of income as highlighted by XTWO’s 30-day SEC yield of 4.20%. That’s impressive when considering credit and rate risks are relatively benign with this ETF.

What Investors Get with XTWO

With XTWO, investors get a low-cost income generator with minimal risk. Alluring traits to be sure, but not ones that will make an investor rich. It’s important to understand that before embracing ETFs of this nature.

“Thanks to their short maturities, though, their losses are more muted than those of longer-term instruments. Credit risk — that is, the risk that a company won’t be able to repay its debt — can also be an issue for corporate bonds,” noted Morningstar analyst Amy Arnott. “In practice, this means that short-term bonds have generated relatively low returns — but they also court less volatility than any other asset class except cash.”

While XTWO might not be in store for glamorous returns, the time could be appropriate to consider the fund not only because of its tidy income but also because history confirmed short-term bonds are usually at their best when interest rates and inflation are declining.