- 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.
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.
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.
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.
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