2023-10-24 11:56:59 ET
Summary
- JPMorgan Ultra-Short Income ETF, JPST, and SPDR® Bloomberg 1-3 Month T-Bill ETF, BIL, are popular short-term income ETFs focusing on investment-grade bonds and T-bills, respectively.
- JPST has slightly higher credit risk and yield compared to BIL, but both have low credit risk and minimal losses during downturns.
- BIL has lower interest rate risk and slightly higher current yield, while JPST has stronger long-term total returns.
The JPMorgan Ultra-Short Income ETF ( JPST ), focusing on short-term investment-grade bonds, and the SPDR® Bloomberg 1-3 Month T-Bill ETF ( BIL ), focusing on T-bills, are two of the most popular short-term income exchange-traded funds, or ETFs, in the market today. Due to the significant similarities between these two funds, we thought to write a quick article comparing them.
JPST focuses on investment-grade bonds, with very low credit risk. BIL exclusively invests in T-bills, with effectively no credit risk. JPST's holdings are marginally riskier, but also higher-yielding.
JPST focuses on short-term bonds, with an average duration of 0.6 years. BIL's T-bills are even shorter-term securities, with a duration of 0.1 years. JPST has a bit more interest rate risk, but the difference is marginal.
JPST has outperformed BIL since inception, due to its higher yield. It has matched its performance since the Fed started to hike rates, as the excess returns from its higher yield has been cancelled out by its higher rate risk.
In my opinion, both funds are reasonable investment opportunities, and particularly appropriate for conservative, short-term investors. BIL seems better suited for the most conservative, short-term investors, for whom capital stability is paramount. JPST makes a bit more sense for those willing to withstand slight, short-lived volatility, to receive slightly higher dividends and returns.
JPST versus BIL
Credit Risk
JPST exclusively invests in investment-grade bonds, with strong credit ratings. The fund focuses on bonds rated AA and AAA, with sizable investments in those rated A and BBB. Credit risk and default rates are both low, even during adverse economic scenarios.
JPST
BIL exclusively invests in T-bills. Said securities are issued by the U.S. Treasury, and backed by the full faith and credit of the U.S. government. Credit risk is effectively nil, barring an unprecedented U.S. government default.
BIL
JPST and BIL both have very similar, very low, credit risk. Expect minimal losses during downturns and recessions. JPST is a little bit riskier, so losses should be a little bit higher.
As an example, JPST had a drawdown of around 3.0% during 1Q2020, the onset of the coronavirus pandemic. Said drawdown was a bit higher than expected, likely due to liquidity issues. Said drawdown was still quite low, however. BIL, on the other hand, saw negligible losses during the quarter. Riskier high-yield bonds saw double-digit drawdowns, as did equities.
Data by YCharts
In my opinion, BIL's lower credit risk make it a more appealing investment for more conservative, risk-averse, short-term investors. It took JPST around 2-3 months to fully recover from its pandemic losses. Accordingly, 3 months seems like a good cut-off point for conservative prospective investors. Meaning, those looking for a place to park their cash for 3 months or less might not be willing to stomach JPST's volatility and any potential losses, low as these might be. Those looking for a place their cash for more than 3 months might not mind the volatility, as the fund should be able to recover from any potential losses during the investor's holding period.
Interest Rate Risk
JPST focuses on short-term securities, most of which have maturities of less than one year. The fund itself sports a duration of only 0.61 years, much lower than average for a bond fund.
JPST
JPST's duration means that the fund's share price should decrease by around 0.61% for every 1.0% increase in Fed rates. Importantly, these should be temporary losses, with share prices recovering as bonds mature and are paid back in full.
One can see the process play out in 2022. The Fed hiked by around 1.6% during the first six months of the year:
Data by YCharts
Leading JPST's share price to decrease by around 1.0%:
Data by YCharts
Importantly, and as can be seen above, JPST's share price started to increase thereafter, as the fund's bond portfolio matured. Rate hikes after this point had very limited impact on share prices, as the fund's portfolio was almost entirely new at this point, and had already priced-in future hikes. Although share prices never reached their 2022 highs, losses were completely eliminated, and share prices are currently above inception levels.
BIL focuses on very short-term T-bills, with maturities of 3 months or less. The fund itself sports a duration of 0.09 years, or around 1 month.
BIL
BIL's duration is negligible, so there should be negligible losses during periods of rising rates. This has been the case since early 2022, when the Fed started to hike, as expected.
JPST and BIL both have very low interest rate risk, so both should outperform most bonds and bond sub-asset classes during period of rising rates. BIL has a bit less rate risk, so should perform a bit better than JPST during the same. This has been the case since early 2022, as expected.
In my opinion, BIL's lower rate risk make it a slightly more appealing investment for more conservative, short-term investors.
Right now, due to the possibility of the Fed being forced into leaving rates higher for longer , minimizing interest rate risk seems wise. In my opinion, both funds do very well in this regard, with their difference in duration being negligible for most investors.
Dividend
Both JPST and BIL focus on comparatively safe, investment-grade bonds. These securities have low credit risk, but also low yields. JPST focuses on slightly riskier bonds, slightly increasing dividends relative to BIL.
Both JPST and BIL focus on short-term securities. Long-term securities generally yield more, due to their higher duration, and due to tying investor capital for longer. Right now these yield less , as investors expect significant rate cuts in the coming years. For reference, the U.S. Treasury Yield Curve.
Investment-grade bonds yield less than average, but short-term bonds yield more than average. Short-term investment-grade bonds should yield about average, as seems to be the case for both JPST and BIL. If anything, both funds yield more than average.
Right now, BIL yields around 0.10% more than JPST, due to a combination of recent interest rate hikes and dividend volatility. JPST should yield more long-term / on average, due to investing in bonds with lower credit ratings.
Performance
JPST and BIL both focus on short-term investment-grade bonds. Right now, these securities have comparatively good dividends, leading to good returns and outperformance in the recent past. These are comparatively safe securities, and so tend to have low dividends, and low long-term returns. Long-term returns have been a tad higher than expected, as the funds have performed very well in the recent past
Seeking Alpha - Chart by Author
JPST's slightly stronger long-term returns are the fund's key advantage relative to BIL. As such, and in my opinion, long-term investors might prefer JPST over BIL.
Notwithstanding the above, both funds have weak long-term returns, both realized and expected. As such, and in my opinion, investors with long investment horizons should consider alternatives to either of these funds.
Conclusion
Both JPST and BIL focus on short-term investment-grade bonds, with low credit and interest rate risk. Dividend yields tend to be low, but are at reasonable levels right now, due to Fed hikes.
JPST is a bit riskier than BIL, but tends to yield more, and has stronger long-term total returns. In my opinion, BIL seems like a better fit for very short-term investors, with investment horizons of less than 3 months. JPST seems like a better fit for those with longer investment horizons.
For further details see:
JPST Vs. BIL: Which Is Best For Income Investors And Retirees?