Short Duration Still Has a Role to Play

What’s the story in bonds looking to next year? Gauging how much duration to add to a portfolio certainly remains a key challenge. While dropping rates have certainly bolstered the case for adding longer duration, inflation could stick around and keep rates steady next year. What’s more, there are scenarios where rates may “rise” again should those cuts exacerbate inflationary government policies. Active investing in fixed income offers solutions, with the active short-duration ETF TBUX an option for those wanting an adaptable, focused strategy.

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The T. Rowe Price Ultra Short-Term Bond ETF (TBUX) charges just 17 basis points, a low fee for an active fund, for its approach. The strategy, which hit its three-year ETF milestone this September, looks to provide a high level of income via corporate and government debt. Specifically, the active short-duration ETF seeks out mortgage-backed securities, muni bonds, money market securities, and other mostly U.S. dollar-denominated debt. Together, the strategy’s managers look to craft an effective duration of 1.5 years or less.

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Leaning on T. Rowe Price’s fundamental research capabilities, the strategy applies more scrutiny to bond issuers and their credit than passive funds can. In addition, the strategy’s active flexibility provides an even greater benefit, given the turnaround in shorter duration. An active ETF like TBUX can augment holding a passive bond index like the AGG or complement an active core fund that may be more intermediate or broadly focused. Of course, ultra short-term bond ETFs like TBUX provide a way to move off the sidelines from lower-yielding cash and money markets while still maintaining a relatively low level of volatility.

As of November 30, TBUX offered investors a 30-day SEC standardized yield of 4.9%, per T. Rowe Price data. Performance-wise, the strategy has returned 7.5% over the last year, beating the Bloomberg Short-Term Government/Corporate Index, its benchmark, at that time. With persistent questions about duration looming, investors may want to revisit the case for a fund like TBUX.

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