GSY - Allocating Cash: Three Reasons To Consider Ultrashort Bond Funds

2023-12-09 07:45:00 ET

Summary

• Actively managed ultrashort bond funds offer higher yields and total returns compared to money market funds and other cash alternatives.
• Ultrashort bond funds have remained competitive despite rate hikes by the Federal Reserve.
• Waiting until yields are low may result in missing out on extra total return, making it advantageous to consider ultrashort bond funds now.

By Greg Seals, Senior Client Portfolio Manager

If you’re looking to maximize yields and return potential on the cash portion of a client’s portfolio, now’s a good time, in our view, to consider actively managed ultrashort bond funds. They seek to provide higher yields and total returns compared to money market funds and other cash alternatives. They may be especially useful for investors who can extend the duration of their cash investments slightly. Here are three reasons to consider active ultrashort bond funds for a cash allocation.

1. Extend duration to potentially lock in higher yields than those offered by cash instruments

The yields for active ultrashort bond funds are competitive with, or higher than, other cash yields, as represented by the Treasury Bill Index, which yields Short Term 5.29% as of Nov. 24, 2023. For example, the SEC 30-day yield is 5.30% for Invesco Short-Term Treasury ETF ( TBLL ), 5.59% for Invesco Conservative Income Fund ( ICIFX ), 5.59% for the Invesco Ultra Short Duration ETF ( GSY ), and 6.30% for the Invesco Variable Rate ETF ( VRIG ), as of Nov. 24, 2023. ¹ Additionally, actively managed ultrashort funds offer investors the opportunity to invest in a more diverse, higher yielding array of assets including corporate bonds and structured securities. (Sources: Invesco and Bloomberg.)

2. Ultrashort returns stayed competitive despite rate hikes

As the chart below shows, ultrashort returns approximated money market and Treasury bill returns in 2023 despite 100 basis points of rate hikes by the Federal Reserve (Fed). Plus, in 2019, the last time short-term rates peaked and subsequently fell, returns for ultrashort funds beat money market funds and Treasury bills. Gaining some duration from locking in yields paid off for several years after the peak in rates.

Ultrashort remained competitive during past Fed tightening and easing

3. Waiting until yields are low may not be the best strategy

Historically, investors in ultrashort strategies have been slow to respond to Fed easing, waiting until their cash-based yields are notably lower than ultrashort yields. By that time, much of the extra total return was missed. This happened in the Fed easing cycles in the early 2000s and 2007-2008.

Investor interest in ultrashort has lagged Fed easing

Conclusion

While the bond market has been challenging in 2023, extending out some cash balances in ultrashort bond funds is compelling, in our view. Invesco utilizes the breadth of its Global Liquidity, Investment Grade Credit, and Structured Investments teams’ capabilities to build ultrashort portfolios that can help position short-term bond portfolios.

Footnotes

1Per the current prospectus...etc. Total expense ratio for Invesco Variable Rate Investment Grade ETF ( VRIG ) is 0.30%; Invesco Ultra Short Duration ETF ( GSY ) is 0.22%; Invesco Short Term Treasury ETF ( TBLL ) is 0.08%; Invesco Conservative Income Fund (institutional class) is 0.27% and Invesco Government Money Market (Cash Reserve Shares) is 0.47%. Effective after the close of markets on Aug. 25, 2023, the Invesco Treasury Collateral ETF (CLTL) changed to Invesco Short Term Treasury ETF (TBLL). No other changes were made to the Fund. See the prospectus for more information. For standardized performance, click here for mutual funds ; click here for ETFs ; Click here for money market funds .

Performance quoted is past performance and cannot guarantee comparable future results; current performance may be lower or higher. Visit Invesco for the most recent month-end performance. Investment return and principal value will vary so that you may have a gain or a loss when you sell shares. Fund performance reflects any applicable fee waivers and/or expense reimbursements. Mutual fund performance figures reflect reinvested distributions and changes in net asset value ('NAV') and the effect of the maximum sales charge unless otherwise stated. Had fees not been waived and/or expenses reimbursed currently or in the past, returns would have been lower. Index returns do not reflect any fees, expenses or sales charges. An investment cannot be made into an index. Invesco Conservative Income Fund Institutional Class shares have no sales charges; therefore, performance is at NAV. Invesco Conservative Income Fund Institutional Class incepted on July 1, 2014. Returns less than one year are cumulative; all others are annualized. ETF market returns are based on the midpoint of the bid/ask spread at 4 p.m. ET and do not represent the returns an investor would receive if shares were traded at other times. As the result of a reorganization on April 6, 2018, the Invesco Ultra Short Duration ETF returns presented reflect performance of the Guggenheim predecessor fund. Invesco is not affiliated with Guggenheim.

Important information

NA3199278

Invesco Government Money Market Fund: You could lose money by investing in the Fund. Although the Fund seeks to preserve your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the Fund is not a bank account and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor is not required to reimburse the Fund for losses, and you should not expect that the sponsor will provide financial support to the Fund at any time, including during periods of market stress.

The ICE BofA 3-Month U.S. Treasury Bill Index is an unmanaged index that is comprised of a single U.S. Treasury issue with approximately three months to final maturity, purchased at the beginning of each month and held for one full month.

Obligations issued by US Government agencies and instrumentalities may receive varying levels of support from the government, which could affect the fund's ability to recover should they default.

The Fund's yield will vary as the short-term securities in its portfolio mature or are sold and the proceeds are reinvested in other securities. Additionally, inflation may outpace and diminish investment returns over time.

The Funds are subject to certain other risks. Please see the current prospectus for more information regarding the risks associated with an investment in the Fund.

Invesco Variable Rate Investment Grade ETF, Invesco Ultra Short Duration ETF and Invesco Short Term Treasury ETF: There are risks involved with investing in ETFs, including possible loss of money. Index-based ETFs are not actively managed. Actively managed ETFs do not necessarily seek to replicate the performance of a specified index. Both index-based and actively managed ETFs are subject to risks similar to stocks, including those related to short selling and margin maintenance. Ordinary brokerage commissions apply. The fund's return may not match the return of the Index. The funds are subject to certain other risks. Please see the current prospectus for more information regarding the risk associated with an investment in the funds.

ETF Shares are not individually redeemable, and owners of the Shares may acquire those Shares from the fund and tender those Shares for redemption to the fund in Creation Unit aggregations only, typically consisting of 10,000, 50,000 and 100,000 Shares.

Investors should be aware of the material differences between money market funds (MMFs), mutual funds and ETFs. Government and Constant NAV Retail MMFs seek to preserve your investment at $1.00 per share but cannot guarantee it will do so. Floating NAV MMFs share prices will fluctuate, so when you sell your shares, they may be worth more or less than what you originally paid for them. Constant NAV Retail and Floating MMFs may impose a fee upon the sale of shares. ETFs generally have lower expenses than actively managed mutual funds due to their different management styles. Most ETFs are passively managed and are structured to track an index, whereas many mutual funds are actively managed and thus have higher management fees. Unlike ETFs, actively managed mutual funds have the ability to react to market changes and the potential to outperform a stated benchmark. Since ordinary brokerage commissions apply for each ETF buy and sell transaction, frequent trading activity may increase the cost of ETFs. ETFs can be traded throughout the day, whereas mutual funds are traded only once a day. While extreme market conditions could result in illiquidity for ETFs. Typically, they are still more liquid than most traditional mutual funds because they trade on exchanges. Investors should talk with their financial professional regarding their situation before investing.

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations), and investors may not get back the full amount invested.

All fixed income securities are subject to two types of risk: credit risk and interest rate risk. Credit risk refers to the possibility that the issuer of a security will be unable to make interest payments and/ or repay the principal on its debt. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa.

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©2023 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is not guarantee of future results.

A basis point is one hundredth of a percentage point.

Duration measures a bond's or fixed income portfolio's price sensitivity to interest rate changes.

Quantitative easing ('QE') is a monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective.

Quantitative tightening ('QT') or tightening is a monetary policy used by central banks to normalize balance sheets.

The yield curve plots interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates. An inverted yield curve is one in which shorter-term bonds have a higher yield than longer-term bonds of the same credit quality. In a normal yield curve, longer-term bonds have a higher yield.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.

The opinions referenced above are those of the author as of December 7, 2023. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

Original post: Allocating Cash: Three Reasons To Consider Ultrashort Bond Funds by Invesco US.

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