JPST - An Investor's Guide To Ultra-Short Bond ETFs (Part 2)

2023-07-24 10:05:04 ET

Summary

• Part 2 of this guide to ultra-short-term bond ETFs discusses BIL, PULS, and JPST, highlighting their pros, cons, and suitability for different types of investors.
• The ETFs are attractive because they offer a low-risk and high-yield investment. However, they differ in volatility, yield, and capital appreciation potential.
• Most investors should own an ultra-short-term bond ETF due to the favorable risk-reward ratio, but the choice of ETF depends on individual risk tolerance and investment outlook.

In Part 1 of this two-part guide on ultra-shot-term bond ETFs, I covered SGOV, ULST, and VUSB. Just to recap, ultra-short bonds have grown in popularity recently because the fed funds rate is at a two-decade high, making them a very low-risk and high-yield investment. Investors should always be looking for low-risk and high-yield investments and currently, ultra-short bonds provide exactly that. There are many ultra-short bond ETFs, and they are all generally similar; however, they do have small differentiating factors. Making small changes to your portfolio can have big effects long term.

Just like part one, I will introduce each ETF, address its pros and cons, and then give my opinion on what kind of investor the ETF is best suited for. At the end, I will give a "cheat sheet" that breaks down the three ETFs covered in this article at a glance, along with the three ETFs covered in part one. This article (part two) covers BIL, JPST, and PULS.

BIL

• 30-day SEC yield: 5.02%
• AUM: $27.74B
• Expense ratio: 0.14%
• Average maturity: 0.10 years

SPDR Bloomberg 1-3 Month T-Bill ETF ( BIL ) is the largest ETF in this guide. As its name suggests, it holds 1-3 month T-bills. Because it holds very short-term T-bills, it has very little volatility. It only has 20 holdings, but this isn't an issue considering they are all ultra-short T-bills.

Pros

The chart below shows its total return for the last three years.

It's very easy to see how little volatility it has. It has a very flat and smooth total return until about July 2022, when it changes to a very smooth upward trend.

The yield of the very short-term T-bills BIL holds is very dependent on the fed funds rate. As the fed funds rate has increased, BIL's yield has also gone up. BIL currently has a 30-day SEC yield of 5.02%. This is an impressive yield considering it has almost no risk.

Cons

Because BIL has such a short duration, 0.10 years, its price isn't sensitive to interest rate changes. This means that when rates are eventually cut, its yield will go down, and it won't experience any capital appreciation. This won't be a problem for a while. Fed Chairman Powell has indicated that he expects it will be a couple of years before rate cuts start. So until then, BIL will continue to be a low-risk, high-yield asset.

Who is BIL for?

BIL is for investors who want a cash alternative with very little volatility and a high current yield and are willing to give up capital appreciation potential for that.

PULS

• 30-day SEC yield: 5.13%
• AUM: $4.67B
• Expense ratio: 0.15%
• Average maturity: 1.3 years

PGIM Ultra Short Bond ETF ( PULS ) pushes the definition of the term "ultra-short", having an average maturity of 1.3 years. PULS is an actively managed fund that aims to provide investors with income as well as the chance to profit from capital appreciation. PULS holds 516 bonds issued by the US government, US-domiciled corporations, and foreign entities. PULS chooses its holding by using "a combination of top-down economic analysis and bottom-up research in conjunction with proprietary quantitative models and risk management systems to manage the fund's assets." PULS holds high-quality bonds, with almost 80% of them being A-rated or higher.

Pros

Because of PULS's higher average maturity, it has the opportunity to experience some capital appreciation when rates are cut, while still being a low-risk investment. As stated before, rate cuts aren't expected for a couple of years, but when they do happen, PULS will appreciate, and while investors wait for rates to get cut, they will receive a very nice yield of over 5%.

Cons

The chart below shows PULS's total return over the past 3 years.

While it by no means is a volatile asset, it is far more volatile compared to most other ultra-short-term bond ETFs. This isn't necessarily a bad thing. PULS's higher volatility resulting from its longer average maturity gives it more capital appreciation potential.

Who is PULS for?

PULS is for more risk-tolerant investors who are seeking a high current yield now and also want to benefit from capital appreciation.

JPST

• 30-day SEC yield: 5.24%
• AUM: $23.64B
• Expense ratio: 0.18%
• Average maturity: 0.88 years

JPMorgan Ultra-Short Income ETF ( JPST ) is an income ETF that aims to bring investors a high yield while limiting risk. JPST invests in a variety of short-term bonds. About 78% of its holdings are A-rated or higher.

Pros

While JPST holds non-treasury assets and has a longer average maturity, it has kept a pretty smooth return over the past year.

JPST also has capital appreciation potential when rates get cut due to its longer duration.

Another great aspect of JPST is that it will continue to have a higher yield than T-bill ETFs even after rates are cut.

The chart above shows the yield of JPST and BIL over the past three years. The yield shown in the chart is different from what was stated before for both ETFs because of different yield calculation methods, 30-day SEC yield vs TTM. From roughly July 2021 to July 2022, BIL yielded practically nothing, whereas JPST kept a higher yield the entire time.

Cons

Just like PULS, JPST isn't as low in volatility as some alternative ultra-short bond ETFs.

The chart above shows the total return of JPST and BIL. As it illustrates, there are times, specifically the black swan event of COVID-19, when JPST can suffer much more than an ultra-low-risk ETF.

Who is JPST for?

Like PULS, JPST is for investors who have a higher risk tolerance and want a high current yield with capital appreciation potential. However, an investor who wants an ETF with a shorter average maturity should choose JPST over PULS.

A final note on JPST

I waited until I finished my analysis of JPST to include this, so I didn't cause any bias for the reader. JPST is the only ETF in both parts of this guide that I gave a Hold and not a Buy. While I stand by my initial rating and reasoning for that rating, JPST may fit the criteria of some investors.

Investor Cheat Sheet (Part 1 and Part 2)

Conclusion

These three ETFs, BIL, PULS, and JPST, are very similar, but they all offer a different set of pros and cons. Most investors should own an ultra-short-term bond ETF right now because of the favorable risk-reward ratio. Depending on your risk tolerance and investment outlook, it's up to you to choose which ETF is right for you.

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