Ultrashort Bond ETFs

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Today I’m going to talk a bit about an asset class I recently started using, which are Ultrashort Bond ETFs. The name makes them sound like something that invests in companies that produce extreme board shorts or something, but it’s actually far more mundane.

What are Ultrashorts?

Remember that there are two basic asset classes in an investment portfolio: Equity and Fixed Income. Equity generally invests in companies, while fixed income generally invests in bonds. I know there are more esoteric things like Preferred Shares (which we write about here), but let’s keep things simple for this example.

When picking a bond ETF, there are two basic knobs you can turn: Credit Quality and Duration. Credit quality is a measure of how likely the bond’s interest payments will be made. A high credit quality like the US government’s means the bond will definitely be paid, while a lower credit quality like some airline means the bond might default. Lower credit quality bonds will generally have a higher yield, since investors will demand to be compensated for taking on the risk.

Duration measures the average time to maturity of the bonds in that fund. The longer the duration, the more sensitive it is to interest rate changes by the central bank, and therefore the more volatile that fund will be.

Ultrashorts are designed to be ultra-safe (maybe they should have called them that instead). So they typically invest only in bonds that have the maximum possible credit quality (like government bonds), and the shortest possible durations. These ETFs only pick up bonds that are less than a year from maturing, making their durations ultra short, hence the name Ultrashort.

And for the eagle-eyed finance nerds out there who may be thinking “Wait, isn’t this the same as a money market fund?” The answer is that they’re very similar. Money market funds basically do the same thing, but they’re structured as mutual funds, meaning you can only buy them if you open up an account at that financial institution. Ultrashorts are ETFs, meaning they’re traded on the stock market and therefore can be bought by anyone with a trading account.

I’m going to use SHV, which is iShares’ largest Ultrashort fund, as an example here, though all Ultrashorts should behave the same. Right now, SHV’s 12-month trailing yield is about 2.35%, so it’s basically yielding what the short end of the US treasury yield curve is paying. If we were to pull up SHV’s price history, it looks like this:


Ultrashorts trade in this unique “saw-tooth” pattern. This is because Ultrashorts’ price is typically only affected by one thing: when the next interest payment will be.

SHV distributes interest payments at the end of each month. So as the date gets closer to the end of the month, it’s share price rises in anticipation of that sweet sweet cash distribution. Then, when that cash distribution get paid out, its share price drops by the same amount as that distribution since the fund just gave everyone a bunch of cash, then the cycle repeats itself.

The best time to buy into an Ultrashort fund is at the bottom of the saw-tooth cycle. That way, your position will only be in one of two states:

  • Going up in value as the month goes on
  • Bouncing back down to your original buy price when you get paid interest

Doing this allows you to exit your position at any time and still get part of that month’s interest payment. For example, if you need to get out halfway through the month, the ETF will have gone halfway up the saw-tooth, so if you sell at that point, you will get half that month’s interest as a capital gain.

So basically, an Ultrashort is a low-risk way of making money, since it invests in low-risk assets like US treasuries, while at the same time being super liquid, since you can get out at any time with all your money (and any partial interest you’ve earned to boot!)

Who Should You Own This?

Now I’m not suggesting you go dump all your money into an Ultrashort. Ain’t nobody retiring anytime soon on a 2.35% return rate. But as it turns out, these can be pretty useful to some people as part of your retirement portfolio. Specifically…

If You’re Retired and Need a Place To Store Your Yield Shield

When you’re still working, we generally advise that as you get dividends you reinvest them since you don’t need the cash right away. But when you’re early retired like us and your portfolio is structured as a Yield Shield, you need that cash you’re generating to live.

Over the course of the year, our portfolio throws off about $35,000 in cash. That’s not chump change. And by simply putting that cash as it gets generated into an Ultrashort, I can make interest on that as the year goes on. What has two thumbs and likes free money? THIS GUY.

If You Have a Lot of Foreign Cash

Despite the fact that I’m Canadian, I actually hold a lot of US cash these days. This is because most of the advertisers on this blog, plus our publisher happens to be American, so when we get paid it’s in USD. And because I’m Canadian, we have very limited places to put that USD. A typical USD-denominated savings account in Canada, for example, might pay 0.01%.

But if I stick my USD in a brokerage account and buy a USD-denominated Ultrashort fund like SHV, I can actually earn a decent American interest rate on that money despite the fact that I’m not American myself.

So whether you’re holding Canadian Dollars, American Dollars, Pounds, or Euros, there’s a way to get an interest rate on that money as if you’re living in that country using an Ultrashort denominated in that currency. Here are a few you can use.

CMRiShares Premium Money Market ETFCAD
SHViShares Short Treasury Bond ETFUSD
ERNSiShares £ Ultrashort Bond UCITS ETFGBP
ERNEiShares € Ultrashort Bond UCITS ETFEUR

If You’re Not Allowed to Open up a HISA (High Interest Savings Account)

If you’re American you might be looking at all these hoops and thinking “This seems like too much work. Why don’t I just open up a Savings Account with Ally or something?” And that’s true. You can get 2.2% on your cash at Ally right now, which isn’t that far off the yield on SHV.

But one of the requirements of opening up an account with an online bank is that you have to be a U.S. citizen or permanent resident. So if you’re not one of those things (like, a non-resident alien), you can use Ultrashorts to make a low-risk return on your money.


So that’s it! The exciting world of Ultrashort Bond ETFs. Thoughts? Questions? Let’s hear them below!

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45 thoughts on “Ultrashort Bond ETFs”

  1. This shorter term stuff looks more interesting when the market is frothy like now and the yield curve inversion makes these shorter term yields even more attractive now as well. I do some of this myself but I tend to just buy US T-bills directly and ladder them with shorter term maturities. It’s similar to the fund but no overhead fees and perhaps less volatile (the price of the ETF is still susceptible to investor sentiment if you had to get out in a hurry). Downside, compared to this ETF approach is that if you do it yourself you have to buy a lot of t-bills and run your own ladder to save what might be just a few bucks.

      1. I’m experimenting with this too at Fidelity. I’m paying no fees to buy new issue US Treasuries. Their set-up is such that I can auto-roll them into new Treasuries or manually do so. I’m mostly looking at 3-mon, 6-mon and 1-year to build a short term ladder.

        My thought process is the same as Life Outside the Maze above. I can get the 2.4% or so guaranteed and there is no ETF share price volatility to worry about, and principle + interest is coming into the core account every month. So far, so good.

      2. I pay no commission to buy t-bills directly and they are usually sold in increments of $1K USD. Another way of saying it is that the fees are paid indirectly by the entity issuing to the agent when this or any other bonds are issued or put up for sale. Since I hold all of these through maturity (less than a year in the case of t-bills) I pay nothing to sell them either. The rates are currently around 2.4% which is similar to money market or high yield checking accts though (to Mr Tako’s comment). The only advantage is no overhead fees and some brokerages don’t do automatic money market on your uninvested cash so doing something like this can be a substitute. With the cash laddered in these it is quickly ready to invest in a brokerage acct as each bill matures (as opposed to a high yield checking account where transfer is needed).
        Also, t-bills are of course backed by the government however you want to assess that risk profile vs other money market like instruments. Hope this wasn’t TMI? :/

      3. It’s always a smart move for people to buy T-bills direct from the government, isn’t it? But not everyone does that. I can’t invest nor collect interest, so all that bond stuff doesn’t apply to me.

  2. Awesome. Nice to see you used the SHV ETF to talk about that because that’s the one I own and I have parked almost 50% of all my money at the moment just sitting on the sidelines (I know you’ll criticize this but it’s my way of investing).
    I’m an NRA as well so I cannot open a HISA as you explained.

    A small correction to your text “requirements of opening up an account with an online brokerage is that you have to be a U.S. citizen or permanent resident”
    You cannot open a HISA if you’re an NRA, a brokerage you can (Interactive Brokers for instance).

  3. These ultra-short etf’s sound almost exactly like a money market fund. Doesn’t your brokerage firm provide USD based money markets? I would think most of them would, and you could earn 2.35% fairly easily.

    What’s the advantage here? Is there some other advantage to the ultra-short etf’s I’m just not seeing?

    1. Mine does not. Remember, I’m Canadian, and our banks/brokerages don’t offer any way of getting a halfway decent return on foreign cash directly.

    1. Don’t know anything about it, but just went to the website and it says “Asset-based investing. 8-20% target returns.” on the main page, so already I’m DEEPLY suspicious.

  4. Woah. At first by “ultrashort bond” I thought you meant an ETF that is an “inverse” ETF that takes on leverage. I was like “what happened to sensible Wanderer?”

    Indeed, the standard Vanguard Money Market sweep fund is yielding basically the same as what you outline here. So I’m gonna skip this one. But I ALWAYS love your outside the box thinking.

    Someday I’m going to talk you out of the wisdom of the yield shield (lower returns, greater volatility), but that’s for another day ;).

      1. Rich Dog,

        Specifically, I think the preferred shares portion of Mil-Rev’s Yield Shield can be sub-optimal. If you go to Yahoo finance and pull up a chart comparing the performance of SPY (the S&P 500 tracker ETF) and PFF (one of the most popular preferred ETFs) from Jan 1, 2008, to Jan 1, 2010, you will see that PFF was significantly more volatile than the S&P 500 through the global financial crisis. And, PFF has not come close to getting back to its pre-crisis highs.

        1. Rich Dog,

          I want to correct one point I just made in responding to you. PFF did eventually surpass its pre-crisis highs when you factor in dividends as well. (I forgot that Yahoo Finance’s charts don’t include dividends.) You can see PFF’s actual performance, including dividends, at StockCharts.com. (The simplest charts there are the PerfCharts.) Still, my point stands that PFF (as a preferred) was crazy volatile during the Global Financial Crisis and you aren’t getting paid a premium (outperformance) for that volatility.

    1. No need. I know the Yield Shield has higher volatility and lower long-term return. That’s why I only advocate holding it for the period in which you’re the most vulnerable to sequence of return risk (first 5 years).

      I’m actually planning on dropping half my Yield Sheild assets at the end of this year, and then completely getting out the year after now that I’m pulling out of that danger zone.

      1. Yo Wanderer, I’d love to get a rundown on this sequence of returns risk thing. What I can’t wrap my mind around is how can you ditch the cash cushion after five years and be clear of a potentially failing portfolio just because the first 5 years are passed?

        For example, if I retire 5 years after you and we both check our accounts in say 2021 and have the exact same balance… Let’s say its exactly 1,025,000 and we both spend exactly 40,000 per year. I’m in year 1 of retirement and you are in year 6… how is it more likely that your account will fair better than mine?

        Wouldn’t I be exposed to the same sequence of returns? I don’t get it! How is it time-linear and not related to your nest egg/spending ratio? I think this warrants an article there Wanderer!

        Break it on down for me…

  5. All my US cash is in my taxable account. And as you surely know, all dividend income has a 15% “penalty”.

    Hence, do you think it’s appropriate to use something like SHV to park cash in a taxable account? Or is there something else for that type of account?

    1. Just use SHV. Yes there will be a 15% withholding tax but you’ll get a foreign tax credit (FTC) back at the end of the year to offset your other taxes, so it all works out to be the same in the end.

      1. Let’s say I have a 60-40 portfolio (Equities-FI), would it be “safe” to invest in a fixed income ETF, such as ZAG.to and ZMI.to for medium term hold?

        And while you’re at it, how about an article on fixed income ETF? 🙂

        1. And you wrote this article on April 22nd, so where did you get 2.35% yield for SHV?

          I see 1.95% on April 26th! (I’m with BMO Investorline).

  6. Nice. It’s good to see sometimes things not targeted to the fluffy americans but to the broad public! Nicely done Wanderer

    1. I’ve never heard of the Americans being described as “fluffy” before, but I’ll use that next that next time I meet one and see if they like it 🙂

  7. Nice to see some posts for non-americans. I’m an NRA and also cannot have a online bank account, only brokerage. I’m happy to find that you’re also a fan of SHV. I’ve been using NEAR etf but analyzing I found SHV to have a slightly higher income payment rate. Thanks for sharing.

      1. Lol you are. NRA is how the IRS call us. They love calling us non Americans of ALIENS. I find it a little pejorative but… So NRA stands for Non Resident Aliens as you probably know.

  8. Argh. I just bought VAB this morning with my Canadian cash, and VTI last week in my US account.

    I’d never heard of ultra-short bonds. I’ll look them up. Millennial Revolution for the win!

    Of course I’ve signed up for your book launch team. It’ll be kickass.

    1. I think you’re fine with what you bought considering where things are heading. The time of short term bonds is done at this time. You want bonds with a longer duration for the foreseeable future.

  9. We’re fans of short bonds in our household — we use Bernstein’s Simpleton’s Portfolio so they are the the only bonds we hold. They sure smooth out the ride, an important thing this close to FI and with CAPE as high as it is.

    Thanks for giving short bonds some love, friend.

  10. Hey Bella; ( beautiful photo above)
    I’ve read your article and wonder what are the tax implications for investing this way. Before getting into ETF’s & bonds etc I had my cash in Scotia at 1.5% every three months. This I thought was ok till the tax man took 40% at tax time. What are the tax implications with investing in this type of short bonds?

  11. I must be missing something? Im based in NL, so would buy ERNE.AS on the Amsterdam exchange. However the performance seems quite different from CMR. 2014 total return was 0.55% 2018 total return was -0.52%. This is far from 2.83%.

    1. Yeah the Euro interest rates suck right now. I think Ultrashort German bund funds are paying 0%. Blame Mario Draghi.

  12. Weren’t you claiming you would put your website and book proceeds into a portfolio B that you wouldn’t touch basically ever for the sake of the experiment? Why would you need quick access to that cash, unless you are cheating clearly?

    Just saying!

    1. Every year I take a withdrawal from my portfolio to pay for my current year’s living expenses. A lot of that is in USD, which I keep in Ultrashorts so I can make interest on it.

  13. Thanks for another great post, Wanderer! Appreciate your blog, as it helps me understand my own finance. You guys rock! Just wanted to clarify one question here.
    As at March 2019, the Total Return of the CMR ETF is 1.49% for past year and 0.90% over 3-years. This is very low, as compared to savings account paid by Equitable (2.3%), Oaken (2.3%), or Motive/CWB (2.8%). Why would you choose the ETF over the savings accounts that are backed up by CDIC? Or am I wrong in comparing Total Return rates vs Savings accounts rates?

  14. Minor epiphany. These very short-term bond ETFs allow you to pick the online broker you like without sacrificing the yield on your cash as much. Example: Schwab’s yield on cash assets is atrocious. But if you sweep your cash into something like SHV, you could still go with Schwab if you like it for other reasons.

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