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2 Ultrashort Bond Fund Picks for a Rising Rate Environment

Bronze-rated Fidelity Conservative Income and Silver-rated PIMCO Short-Term Institutional offer lower rate sensitivity relative to short or intermediate-term bond funds.

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Emory Zink: With two Federal Reserve rate rises so far this year, and the broader markets anticipating continued lifts in the federal funds rate in the near future, the landscape for ultrashort bond funds is at a dynamic point. Ultrashort bond funds blend the higher quality and more liquid bias of money market funds with a sector flexibility that is more similar to short-term bond funds, investing across geographies and in corporate debt and municipals. In a period when interest rates are on the rise, investors may find these types of funds attractive given their lower rate sensitivity relative to short or intermediate-term bond funds. The average duration of the ultrashort category is around a half year.
These funds aren't devoid of risks, though. There is a temptation to load up on lower quality paper and drive up yield, but when liquidity dries up in a credit crisis, ultrashort bond funds that have taken this approach can be hit hard. Yields are also lower at the front end of the yield curve, and a fund with significant fees has an inherently higher hurdle to clear before generating positive return for an investor. Ultimately, it is important for investors to remember that while this category of funds is attractive to an investor wishing to enhance or diversify a cash strategy, the options are not a replacement for a savings account or bank money market fund.
Two of our picks in the category include Bronze-rated Fidelity Conservative Income--a high quality, lower volatility fund with broad sector flexibility--and Silver-rated PIMCO Short-Term Institutional, a fund that manages duration actively and is run by Morningstar’s 2016 Fixed-Income Manager of the Year, Jerome Schneider. 

Emory Zink does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.