4 top currency market ETFs for capital preservation

Money market exchange-traded funds (ETFs) are an essential part of many investors’ portfolios because they provide safety and capital protection in turbulent markets. These funds usually invest in high-quality and highly liquid short-term debt instruments, such as U.S. Treasury bonds and commercial paper, which usually do not provide substantial income.

Although money market ETFs invest most of their funds in cash equivalents or highly-rated securities with very short maturities, some may invest part of their assets in long-term or lower-rated securities. Investors should understand that these securities carry high risks.

Although all investments have certain risks, the following currency market ETFs are relatively safe choices for investors:

  • iShares Short-term Treasury Bond ETF (SHV)
  • BlackRock Short-Term Bond ETF (NEAR)
  • SPDR Bloomberg Barclays 1-3 months T-Bill ETF (BIL)
  • Invesco Super Short-term ETF (GSY)

Read on to learn more about these investments. The information provided here is updated to May 11, 2021.

Key points

  • Money market ETFs are a necessary part of many investors’ portfolios because they provide safety and capital protection in volatile markets.
  • These ETFs invest most of their funds in cash equivalents and very short-term securities, while other ETFs invest part of their assets in long-term securities.
  • The four ETFs that provide safe options are iShares Short-term Treasury ETF, BlackRock Short-term Maturity Bond ETF, SPDR Bloomberg Barclays 1-3 Month T-Bill ETF and Invesco Short-term ETF.

iShares Short-term Treasury Bond ETF

The iShares short-term Treasury ETF is traded on the Nasdaq and invests in the shortest end of the yield curve, focusing on U.S. Treasury bonds from one month to one year before maturity. The fund’s credit risk or interest rate risk is very small, so the return is usually very low. The average annual return of this ETF since its establishment in 2007 is 0.99%. But this is a very safe fund that can store assets in a turbulent market.

The fund holds 39 shares and approximately 52% of its net assets of $14.9 billion are invested in U.S. Treasury bonds. The remaining 48% is invested in cash and/or derivatives. The bond rating of all bond investments of the fund is AAA. The ETF’s expense ratio is very low, at 0.15%.

As of July 2016, the ETF began to track the ICE US Treasury Bond Index. Its performance has been below its benchmark, with a one-year return of -0.01%, while the index has a return of 0.11%.

BlackRock Short-Term Bond ETF

BlackRock’s short-term maturity bond ETF invests most of its assets in investment-grade fixed-income securities, with an average duration of less than one year. The fund is actively managed, which means it will not try to match the performance of the index.

Of the fund’s net assets of US$4.7 billion, 15.2% of its assets are cash and 10.7% are asset-backed securities. Approximately 24% of the fund’s bonds are AAA-rated, approximately 6% are AA-rated, and approximately 32.5% are A-rated. The remaining bonds are rated BBB or BB.

The top five holdings of ETFs are:

  • BLK Treasury Fund
  • Tripartite Goldman Sachs
  • Chartered Communications Operations Co., Ltd.
  • Ford F_19-3 A2
  • Bayer American Finance LLC

The net expense ratio of this ETF is 0.25%.

SPDR Bloomberg Barclays 1-3 months Treasury bill ETF

The SPDR Bloomberg Barclays 1-3 Month Treasury Bill ETF aims to track the performance of the Bloomberg Barclays 1-3 month US Treasury Bill Index and is traded on the Arca Exchange of the New York Stock Exchange. The fund invests in the shortest end of the yield curve and focuses on zero-coupon U.S. Treasury bonds with a remaining maturity of one to three months. It requires very little credit or interest rate risk and therefore seeks to provide safe returns. Due to the short duration of investment in its portfolio, ETFs will rebalance at the end of the month.

Investors should not expect high returns from SPDR Bloomberg Barclays 1-3 months T-Bill ETF. Since its establishment in 2007, the average annual return of the fund has been 0.76%. However, in a volatile market, the fund may be a reasonable investment choice. Keep in mind that even very short-term investments have market risks, especially when short-term interest rates fluctuate.

The fund has a net asset of 12 billion U.S. dollars, of which more than 28 million U.S. dollars in cash investment. The fund’s expense ratio is 0.14%.

Invesco Super Short-term ETF

Invesco Ultra Short Duration ETF attempts to maximize current income, protect capital and maintain liquidity for investors. The fund is actively managed, investing at least 80% of its total assets in fixed income securities. It seeks to surpass the ICE Bank of America Merrill Lynch US Treasury Bill Index. As of April 30, 2021, it has received an overall Morningstar four-star rating among 198 funds.

The ETF holds securities with an average duration of less than one year, including U.S. Treasury bonds, corporate bonds and high-yield bonds. The high-yield part may increase returns, but it may also slightly increase the risk of the fund. But short-term holding of high-yield bonds may reduce its risk.

Compared with other ETF money market funds, the fund’s riskier portfolio produces slightly higher returns than average. The fund’s one-year yield is 0.12%, the three-year yield is 1.5%, and the five-year yield is 1.2%. The fund has a net asset of US$3.02 billion and a total expense ratio of 0.22%, which is higher than the average level of money market funds.

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