Investors in the U.S. are increasing their investments in ultra-short-term bond and money market funds
U.S. investors are increasingly directing funds into short-term instruments, particularly ultra-short-term bond funds and money market funds. The reasons include fears of a potential stock market correction and the poor performance of long-term U.S. Treasury bonds, according to CNBC.
Over the past decade, the S&P 500 has mostly posted double-digit returns, with its growth in recent years driven by large technology companies and the artificial intelligence boom. Christopher Coolidge, chief investment officer at Brookwood Investment Group, noted that following one of the strongest periods for stocks in history, investors are paying closer attention to the risk of a market decline.
The average yield on bank deposits in the U.S. is well below 1%, while long-term bonds have suffered losses amid uncertainty about interest rates. Over the past five years, the average annual return on the iShares 20+ Year Treasury Bond ETF was minus 6.7%, while that of the iShares 7-10 Year Treasury Bond ETF was minus 1%.
At Brookwood Investment Group, the share of cash assets in model portfolios has increased from approximately 2% in June to 5%. For this portion of the portfolio, the company uses a set of ultra-short ETFs with exposure to Treasury securities and floating-rate instruments, as well as active credit management and option income strategies.
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Ultra-short-term bond funds primarily invest in debt securities with maturities of up to one year, including government bonds, investment-grade corporate debt, asset-backed securities, and commercial paper. According to Morningstar Direct, inflows into ultra-short-term bond ETFs reached $12.8 billion in July. Culidge stated that such funds can yield 75–110 basis points more than money market ETFs with comparable duration and sensitivity to interest rate changes.
Money market funds eliminate interest rate risk. At the end of July, nine U.S. money market ETFs managed $24 billion in assets, while money market mutual funds held $7.7 trillion. From January through July, net inflows into money market ETFs totaled $18.7 billion.
Experts surveyed by CNBC advise investors not to try to time the market and not to move entirely into cash. They recommend rebalancing the portfolio based on the investor’s age, assets, liabilities, and risk tolerance.
