SEC Warns on Ultra-Short Bonds
The SEC posted a primer entitled, "Ultra-Short Bond Funds: Know Where You're Parking Your Money. It says, "Ultra-short bond funds are mutual funds that generally invest in fixed income securities with extremely short maturities, or time periods in which they become due for payment. Like other bond mutual funds, ultra-short bond funds may invest in a wide range of securities, including corporate debt, government securities, mortgage-backed securities, and other asset-backed securities. If you are considering investing in an ultra-short bond fund, keep in mind that ultra-short bond funds can vary significantly in their risks and rewards. In fact, some ultra-short bond funds may lose money despite their investment objective of preserving capital. The level of risk associated with a particular ultra-short bond fund may depend on a variety of factors, including: Credit Quality of the Fund's Investments -- It's important to know the types of securities a fund invests in because ultra-short bond funds may experience losses due to credit downgrades or defaults of their portfolio securities. Credit risk is less of a factor for ultra-short bond funds that principally invest in government securities. By contrast, if you invest in an ultra-short bond fund that invests in bonds of companies with lower credit ratings, derivative securities, or private label mortgage-backed securities, you'll generally be subject to a higher level of risk. Maturity Dates of the Fund's Investments -- The maturity date of a security is the date that it becomes due for payment. An ultra-short bond fund that holds securities with longer average maturity dates will be riskier than a fund with shorter average maturity dates — assuming the funds are otherwise similar. Sensitivity to Interest Rate Changes -– Generally, when interest rates go up, the value of debt securities will go down. Because of this, you can lose money investing in any bond fund, including an ultra-short bond fund. In a high interest rate environment, certain ultra-short bond funds may be especially vulnerable to losses. Before you invest in any ultra-short bond fund, be sure to read about a fund's "duration," which measures how sensitive the fund's portfolio may be to changes in interest rates." Finally, note that Crane Data plans to launch a new publication, Bond Fund Intelligence, to cover the largest ultra-short bond funds, ETFs, "enhanced cash" vehicles, and separate accounts in this space. Contact us at info@cranedata.com for more information or to receive the beta issues of our pending Bond Fund Intelligence.
