Money market exchange-traded funds (ETFs) are a necessary part of many investors' portfolios because they can provide safety and preservation of capital in a turbulent market. These funds generally invest in high-quality and very liquid short-term debt instruments, such as U.S. Treasury bonds and commercial paper, which don't usually provide significant income.
While money market ETFs invest the majority of their funds in either cash equivalents or highly rated securities with very short-term maturities, some may invest a portion of their assets in longer-term or lower-rated securities. Investors should understand that those securities present higher risks.
Although all investments pose some risks, the following money market ETFs are relatively safe option for investors: the iShares Short Treasury Bond ETF (SHV), the iShares Short Maturity Bond ETF (NEAR), the SPDR Barclays 1-3 Month T-Bill ETF (BIL) and the Invesco Ultra Short Duration ETF (GSY).
The information provided here was accurate as of Oct. 6, 2018.
IShares Short Treasury Bond ETF
The iShares Short Treasury Bond ETF invests in the very shortest end of the yield curve by focusing on U.S. Treasury bonds that have between one month and one year until maturity. The fund takes very little credit risk or interest rate risk and, therefore, generally delivers very low returns; its average annual return rate since it's inception in 2007 is 0.89%. However, for the same reason, it's a very safe fund in which to park assets during turbulent markets.
The fund invests about 69% of its $14.88 billion net assets in Treasury bonds and cash equivalents and about 31% in cash or derivatives. All of the fund's bond investments have the highest bond rating of AAA. The ETF has a low expense ratio of 0.15%.
IShares Short Maturity Bond ETF
The iShares Short Maturity Bond ETF invests the majority of its assets in investment-grade, fixed-income securities with an average duration that is generally less than one year. The fund is actively managed and does not attempt to match the performance of an index.
The fund has 410 holdings, and 11.34% of its $4.72 billion net assets are in cash and 18.85% are in asset-backed securities. Approximately 30% of the fund's bonds receive AAA ratings, about 18% receive AA ratings and about 21% garner A ratings. The remaining bonds receive BBB ratings. This ETF has an expense ratio of 0.25%.
SPDR Barclays 1-3 Month T-Bill ETF
SPDR Barclays 1-3 Month T-Bill ETF seeks to track the performance of the Bloomberg Barclays 1-3 Month U.S. Treasury Bill Index. The fund invests in the shortest end of the yield curve and focuses on zero-coupon U.S. Treasury securities with remaining maturities between one and three months. It takes very little credit or rate risk and, therefore, seeks to deliver safe returns.
Investors should not expect high yields from the SPDR Barclays 1-3 Month T-Bill ETF. Since its inception in 2007, the fund has generated an average annual return of 0.52%. However, the fund may be a reasonable investment option during volatile markets. Keep in mind that even very short-duration investments carry market risks, especially when short-term interest rates are volatile.
The fund has $3.54 billion in net assets and an expense ratio of 0.14%.
Invesco Ultra Short Duration ETF
The Invesco Ultra Short Duration ETF attempts to maximize current income, preserve capital and maintain liquidity for investors. The fund is actively managed and seeks to outperform the Bloomberg Barclays 1-3 Month U.S. Treasury Bill Index and ICE Bank of America-Merrill Lynch U.S. Treasury Bill Index.
This ETF holds securities with average durations of less than a year, including U.S. Treasuries, corporate bonds and up to 10% in high-yield bonds. The high-yield portion may boost returns but also may slightly increase the risk of the fund. However, the short-term duration of the high-yield holdings may mitigate its risk.
The fund's slightly riskier portfolio has generated slightly above-average returns relative to other ETF money market funds: one-year returns of 2.19, three-year returns of 1.85% and five-year returns of 1.54%. The fund had $1.48 billion in net assets and an expense ratio of 0.27%, which is higher than the average money market fund.