Morningstar on Ultra-Short Bond Funds
Morningstar writes about "Bond Funds That Are All Defense." They explain, "The prospects for investors seeking income within the relative safety of the ultrashort bond Morningstar Category have been muted for the past few years. This is largely by design, as the very traits that make ultrashort bond funds attractive in both rocky credit markets and rising rate environments also put a damper on their yields. Investors may find themselves attracted to ultrashort bond funds for a number of reasons. At a time when most savings and money market accounts have yielded close to zero for a number of years, the incremental yield offered by a 'cash plus' ultrashort bond fund could be attractive to the investor seeking a place to park cash for a period of time." Morningstar's piece continues, "On the other hand, with many intermediate core bond category funds posting duration figures approaching multidecade highs, investors interested in broad fixed-income exposure may find themselves attracted to an ultrashort bond fund simply to lower their interest-rate risk. If investors stay cognizant of these funds' distinct profiles relative to other fixed-income funds and to one another, ultrashort bond funds can be valuable portfolio building blocks in a variety of market environments." It adds, "Ultrashort bond funds invest largely in investment-grade fare (though some will invest modestly in high-yield debt) and have an effective duration, a measure of interest-rate risk, 25% or less than the three-year average effective duration of the Morningstar Core Bond Index. In practice, most ultrashort funds post duration figures of less than one year and prove far more resilient in rising rate environments than their counterparts farther up the maturity ladder. When yields spiked in the first quarter of 2021, the average intermediate core bond fund posted a 2.9% drop, whereas the average ultrashort bond fund eked out a 0.2% gain. Two ultrashort bond strategies illustrate the category's relative risk and rewards: Fidelity Conservative Income Bond (FCONX) and Pimco Short-Term (PSHAX)."
