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(Arpad Benedek/Arpad Benedek / iStockphoto)
(Arpad Benedek/Arpad Benedek / iStockphoto)

ETFs

ETFs that beat money market yields Add to ...

Since the financial crisis, investors have been fleeing money-market funds. Assets in the funds total $2.6-trillion, down from $3.8-trillion in 2008, according to the Investment Company Institute. Puny interest rates have caused the exodus. According to Crane Data, the average money market yields 0.05 per cent.

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Some of the money has flowed to intermediate-term exchange-traded funds. A favourite choice is iShares iBoxx $ Investment Grade Corporate, which has recorded $7-billion in inflows this year, according to IndexUniverse.com. The iShares fund yields 3.8 per cent, but it comes with certain risks.

The portfolio has a duration of almost eight years. So if interest rates rise by a percentage point in the next year – as some economists expect – the fund could lose about 8 per cent.

To get a bigger yield, consider an ultrashort bond fund. Though they are a bit riskier than money markets, the ultrashort funds can make solid parking places for cash that can be set aside for a year or longer. A top choice is PIMCO Enhanced Short Maturity ETF, which yields 1.07 per cent and has a duration of 0.98.

To outpace money markets, the PIMCO fund holds some securities with longer maturities. While money-market portfolios must have average maturities of 60 days, the ETF has some securities with maturities of more than five years.

An actively managed portfolio, the PIMCO fund can seek to outdo its benchmark by shifting duration. Recently portfolio manager Jerome Schneider has kept his duration longer than the benchmark figure. PIMCO says the Federal Reserve will continue keeping rates low, reducing the danger that rates might spike.

With rates staying muted, the PIMCO strategy has worked lately. During the past year, the fund returned 2.36 per cent, outdoing the average ultrashort bond fund by a percentage point, according to Morningstar.

Mr. Schneider has freedom to range widely, sometimes looking offshore to buy securities from emerging markets and throughout the developed world. The fund has 3 per cent of assets in the emerging markets and 6 per cent in the U.K.

So far shareholders have faced only limited volatility. The ETF began trading in late 2009 with an initial share price of $100. In 2010, the price dipped to $99.96 and then began an upward trend. The shares recently traded at $101.49.

Investors who seek a steadier parking place than the PIMCO ETF could consider Guggenheim Enhanced Short Duration Bond ETF, which yields 0.47 per cent and has a duration of 0.33. Over the past 52 weeks, the share price fluctuated from a low of $49.54 to high of $50.18.

Actively managed, the Guggenheim ETF can hold securities that are rated below-investment grade. The fund currently has 5 per cent of assets in Guggenheim BulletShares 2015 High Yield Corporate Bond, an ETF that yields 5.2 per cent and has credit quality that is below-investment grade.

“By investing in the high-yield ETF, we can pick up extra yield in an efficient way,” says William Belden, Guggenheim’s head of product development.

For a high-quality choice, consider RidgeWorth U.S. Government Securities Ultra-Short Bond (SIGVX), a mutual fund that yields 0.85 per cent and has a duration of 0.81 years. The fund focuses on government mortgage securities. Those yield a bit more than Treasuries.

About 40 per cent of assets are in adjustable-rate mortgages. If interest rates rise, the yields on the securities would also climb, protecting shareholders against losses. During the turmoil of 2008, the average ultrashort fund lost money, but RidgeWorth sailed through the crisis and returned 3.5 per cent for the year.

During the past five years, the fund returned 2.7 per cent annually.

“We did not lose money during the financial crisis because we are very conservative about the credit risk we take,” says portfolio manager Chad Stephens.

Charles Schwab recently filed to offer an actively managed short-duration ETF, and more companies are likely to follow. With money-market yields stuck at puny levels, investors will continue seeking safe alternatives.

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