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Ultra-Short-Term Bond ETFs Have Attracted $75 Billion of Investor Money in October. Are They a Good Choice for Your Cash?
Key Points
Recent rising bond yields have prompted some investors to consider buying bond ETFs.
Longer-term bonds (like 20 to 30 year maturities) have higher interest rate risk -- their price goes down if interest rates go up after you buy the bond.
An ultra-short-term bond ETF from iShares is yielding 3.79% as of Oct. 29, and an actively managed iShares bond fund is yielding 4.99% -- with higher fees.
Bond yields on widely watched benchmarks like the 10-year U.S. Treasury bond have recently reached 24-year highs. Higher bond yields are making some investors wonder if now is a good time to buy bonds.
The answer depends on "what kind of bonds?" Based on your investment timeline, your risk tolerance, and your overall financial goals, not all bonds are the right choice for every investor.
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If you want to earn a higher yield on your cash, ultra-short-term bond exchange-traded funds (ETFs) might be worth a look. These bond ETFs let you put your money to work without as much interest rate risk as longer-term bonds.
According to Bloomberg research, ultra-short-term bond ETFs have attracted $75 billion of new investor money in October 2026. Some short-term bond ETFs are offering yields of up to 5%.
Let's look at why now could be a good time to invest in bonds -- especially short-term bonds.
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Why buy ultra-short-term bond ETFs?
Longer-duration bonds, like 20-year or 30-year U.S. Treasuries, pay a fixed rate of income for decades – currently about 5.35% for the 20-year Treasury, or 5.32% for the 30-year Treasury. This might sound like a good deal. And long-term bonds can be a good investment if interest rates go lower after you buy them -- because the bonds' price will go up in that scenario.
But those longer-term bonds also have higher interest rate risk. If bond yields (and interest rates) go higher after you buy a bond, the bond's price goes down. This can cause bigger volatility for longer-term bonds.
Investors who want decent yield on their bonds without the risks of rising interest rates might want to consider ultra-short-term bond ETFs. Short-term bonds are still not risk-free. In case interest rates go higher after you buy into an ultra-short-term bond ETF, the price of the ETF could go down. But these short-term bonds are less sensitive to interest rate risk than longer-duration bonds (like 10-year or 20-year Treasuries, for example).
How to buy ultra-short-term bond ETFs
If you want to buy ultra-short-term bond ETFs, look for a fund that holds bonds with short durations, such as less than one year.
The iShares 0-3 Month Treasury Bond ETF (NYSE: SGOV) is an example of an ultra-short-term bond fund. As its full name suggests, SGOV only holds U.S. Treasuries, and all of them are set to mature within three months. This bond ETF is delivering a 30-day SEC Yield of 3.79% as of Oct. 29. In the past five years, it's delivered annualized returns of 3.78%. This fund charges a low expense ratio of 0.09%.
Ultra-short-term bond ETFs might not always outperform the best high-yield savings accounts or money market funds. Depending on how much cash you have available to put into bonds, or where you hold your short-term liquid assets, ultra-short-term bond ETFs aren't always the right choice.
What to consider instead of ultra-short-term bond ETFs
Some bond ETFs called "short duration bond ETFs," could also be worth considering if you want higher yields and can accept the possible risks. The iShares Short Duration Bond Active ETF (NYSEMKT: NEAR) is an actively managed bond fund that was paying a 30-day SEC Yield of 4.99% as of Oct. 29.
This fund holds a broader mix of bonds, including U.S. Treasuries and (mostly) investment-grade corporate bonds. Instead of focusing on 0-3 month maturities, about 91% of the NEAR portfolio is short-term bonds with maturities of less than 5 years.
This fund charges a 0.25% expense ratio, so be sure to consider if it's worth paying that fee. In the past five years, NEAR has delivered annualized returns of 3.78% -- the same as the lower-cost, possibly lower-risk iShares 0-3 Month Treasury Bond ETF.
There's no guarantee that either of these bond funds will be risk-free, beat inflation, or do better than cash in a high-yield savings account. But if you want to earn a decent yield on your short-term liquid assets without worrying about the risks of rising interest rates, choosing shorter-duration bond ETFs is a good move.
Ben Gran has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends iShares Trust-iShares 0-3 Month Treasury Bond ETF. The Motley Fool has a disclosure policy.