Ultra Short-Term Bond ETFs
Charles Schwab is most famous for being a brokerage – and lists plenty of third party ETFs on its website, but Schwab also has an asset management unit running its own mutual funds and ETFs.
Schwab Ultra-Short Income ETF (SCUS) launched on August 13, 2024 invests in very short term investment grade bonds issued by governments or companies. These generally have less than one year until maturity and as such are mainly a yield play without much interest rate duration sensitivity.
The SCUS expense ratio of 0.14% is low for an actively managed credit fund and is very close to the 0.15% charged by another actively managed short term bond product, PGIM Ultra Short Bond ETF.
These expense ratios are a little bit higher than some other US listed ultra short term bond ETFs that do not appear to be actively managed. iShares 0-3 Month Treasury Bond ETF charges 0.09%, and BlackRock Ultra Short-Term ETF charges 0.08%.
Schwab also manages passive credit ETFs with lower costs. Schwab 1-5 Year Corporate Bond ETF and Schwab 5-10 Year Corporate Bond ETF both launched in 2019, charge 0.03% and have tracked their benchmarks, Bloomberg US 1-5 Year Corporate Bond Index and Bloomberg US 5-10 Year Corporate Bond Index, very closely.
We suspect that Schwab has opted for an active approach on the very short term credit ETF because their fund management teams have identified more inefficiencies in shorter dated bonds, offering more potential for active managers to beat the benchmark.
Bonds or cash?
With the consensus forecast now for the Fed to start cutting rates this year, a short term fixed income bond might offer the chance to lock in a bit more income than cash or a money market fund where the yield will probably drop as soon as rates are cut. However, some ultrashort term bond ETF portfolios can have a high cash weighting anyway.
These shorter term ETFs will often have freedom to switch between cash and short term bonds. The BlackRock Ultra Short-Term product currently has about 60% in cash. However the PGIM Ultra Short Bond ETF had only 3.3% in cash or cash equivalents as of July 31, though its allocations do not appear to be quite the same as other Ultra Short term products – it is not strictly limited to under one years and over half of the portfolio is in bonds with maturities between 1 and 3 years. This shows how products with similar names and Morningstar categories can have different approaches.
As of August 15, SCUS had 71.33% in cash, though this might not reflect its longer term target allocation because it might take some time to build up the portfolio.
Double meanings in names
If there is potential for some variety within the Ultrashort bonds category, the name “ultrashort” is itself a potential source of confusion, since some leveraged short ETFs that profit from markets going down rather than up in price also use “ultrashort” in their name (such as ProShares UltraShort QQQ, which offers double the inverse daily performance of the Nasdaq 100). There also seems to be no convention on whether to spell out Ultra and Short as two words, merge them together, hyphenate them or capitalize the Short. It would probably be helpful if providers explicitly named short term bond products as Ultra Short Term, to avoid any possible confusion with directionally short products. Investors should research products carefully to avoid an unintentional bear market bet!
