iShares Short Maturity Bond ETF: A Stable Income In Time Of Uncertainty

Summary

• NEAR invests in short-term investment grade corporate bonds that will mature within 1 year.
• Bonds in NEAR’s portfolio have much lower average default rate than non-investment grade bonds.
• NEAR has low interest rate risk as its bonds have an average effective maturity of only 0.55 years.
• NEAR has an average bond yield of about 2.61% and is a good candidate to consider for investors seeking a stable income.

ETF Overview

iShares Short Maturity Bond ETF (BATS:NEAR) focuses on short-term investment grade corporate bonds in the United States. Given the fact that the Fed has started purchasing investment grade corporate bonds, the risk of credit rating downgrade is mitigated. The fund has low interest rate risk due to the fact that its portfolio of bonds has an average duration to maturity year of 0.55 years. The ETF has a bond yield of 2.61% and is a good fund to own as it offers investors a stable income.

Fund Analysis

A portfolio of investment grade bonds

NEAR’s portfolio of bonds are mostly investment grade corporate bonds. As can be seen from the chart below, investment grade bonds represent nearly 98% of its total portfolio. This makes it a much better choice than other corporate bond ETFs that also holds non-investment grade bonds. This is because investment grade bonds’ default rate is only about 0.10% per year (based on 32-year period measured). On the other hand, average default rate for non-investment-grade bonds is over forty times higher! (about 4.22% per year).

Source: iShares Website

This does not mean that NEAR has no credit risk. In fact, about 38% of its total portfolio include bonds that are BBB rated. These are bonds that are the lowest grade of the investment grade bonds. If the current economic recession caused by COVID-19 deepens and the lockdown continues for an extensive period of time, it is likely that many of these BBB rated bonds will be downgraded to non-investment grade bonds. This might cause some panic selling. However, investors should take comfort especially after the Federal Reserve announced on April 9 that it will also purchase bonds downgraded from investment grade ratings as of March 22 or later that are now rated at least BB-/Ba3. Therefore, the overall credit risk of owning NEAR is still low.

Low interest rate risk

NEAR constructs its portfolio of bonds by only including bonds that will mature within 1 year. In fact, its average effective duration year is only 0.55 years. Its short maturity term means that the fund’s price has little sensitivity to the change of interest rates. As can be seen from the chart below, NEAR’s fund price has only declined by about 1.68% since 2014. On the other hand, the 10-year treasury rate has dropped by nearly 77%. Therefore, the change in interest rate is not likely a factor that investors need to be concerned.

Investor Takeaway

NEAR offers an average yield to maturity of 2.61%. This is much better than the current 2-year treasury yield of only about 0.2%. Given its manageable credit and interest rate risks, this may be a good fund to own if your goal is to earn some fixed income.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.

Comments

[jazznut]

NEAR's monthly dividend has gradually dropped from about 0.12 to 0.08 in about a year, similar to many other short maturity ETFs.

[yeeha99]

I bought about $70,000 of this ETF about 3 months ago, still down over 2%. If you want to park your cash, this is not the place. May be better off with Marcus, Fidelity, or Schwab money market funds.

[Dr0Doom]

@yeeha99 Yep, I'm right there with you, but bought in about 6 months ago, after seeing how stable their 5-yr chart was. It did turn out to be a poor place to park cash. The other thing that is puzzling, is that for the months of Feb, Mar, Apr, May the dividend has been ~18% lower than in 2019. I get it that nothing is paying any interest right now, but to drop 18% yield year-over-year is ridiculous.

[Pops007]

Ploutos, I appreciate these articles. I struggle where to park my cash. The govie money markets at Fidelity are paying .01, they are eating most of that .41 mgt fee. The Fed is backstopping most of these short term bonds. So, March's panic collaspe is behind us.

Still I don't want my return negated by a drop in share price.

[AjaxMag]

@Pops007 You can sell cash-secured Puts or covered Calls (1-2 months) on IEI or IEF. Ladder them in over time in case in % rise, but you can hedge % rate/inflation risk with some IVOL and maybe some BAR, say 5 or 7 to 1, 1 being the hedges. This should be a good bet with the Fed leaving rates lower for longer.

[Seeking Birdies]

That dip back in March sure was not fun for an ETF constructed like this. Still has not recovered.

[PalmDesertRat]

don't be surprised if it never recovers. one of the problems with etf's: when investors bail out, they have to sell the underlying investments. much of what near sold was at a discount to par, so they'll never get it back.

closed-end funds are much better for this type of investment, but I can't find any that are not leveraged.