Investors earn a lucrative 4.4% return on 10 nearly risk-free stocks

Now is one of those rare times when taking less risk can actually pay off. And ultra-safe, short-dated bond ETFs are an easy way to make money.

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Ten of the most popular ultra-short bond ETFs, which hold bonds that conservatively mature in months rather than years, return an average of 4.4%, according to an analysis by Investor’s Business Daily using data from ETF.com and Morningstar Direct.

This is an amazing opportunity to gain more while risking less pain. Bonds in the broader sense yield only 3.96% and have maturities of no more than six years. It even beats the 4% that many high-yield savings accounts pay.

“Cash-like bond ETFs are kings and queens in this market,” said Todd Rosenbluth, research director at VettaFi. “Investors are paid well to wait out market volatility and still have liquidity to re-enter the stock market or take on more credit risk when the environment improves.”

Ultrashort ETFs: More profit, less pain from interest rates

How do you get those low-risk returns?

Ultrashort ETFs, such as SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) pay out even more than the most popular bond ETF: iShares Core US Aggregate Bond ETF (AGG). With BIL, you get an SEC yield of 4.48% despite owning bonds that mature in less than three months. That’s higher than AGG’s 3.96% yield, even though the bonds mature in more than six years.

Why are short-dated bonds safer in this market? Interest rates have gone up. If you own a short-dated bond ETF, its yield will increase quickly if the Fed continues to hike. For long-dated bonds, you would have to wait at least six years before replacing most of the lower-yielding bonds in the ETF’s portfolio.

Such ultra-short-term ETFs come closest to where investors used to rush when looking for risk-free gains: money market funds, says Todd Rosenbluth, research director at VettaFi. Money market funds have been popular in rough markets because they pay high yields and remain priced at $100.

“There are no money market ETFs that stay priced at 100, but there are many ETFs that offer relatively high yields while also investing in short-dated Treasury bills and other investment-grade bonds,” he said.

The ultra-short-term ETFs can also be purchased in an existing portfolio for a small fee. This makes them not only an alternative to money market funds, but also “sweep” accounts where your broker would typically put uninvested money. Sweep accounts typically pay next to nothing.

A look at ultra-short-term games with higher interest rates

To understand how ultra-short-term bond ETFs can help your portfolio, look at the most popular, the $29.9 billion SPDR Bloomberg 1-3 Month T-Bill. Not only does it yield more returns than many savings accounts and retirement funds, it also costs just 0.135% annually. That is competitive with the Vanguard Federal Money Market Fund (VMFXX) calculates 0.11% for its 4.72% yield.

And thanks to higher interest rates, BIL is also holding its course. Shares in the ETF are actually up 0.4% so far this year. Other options like JPMorgan Ultrashort Income ETF (JPST) and iShares Short Treasury Bond ETF (SHV) have also increased by tiny amounts this year.

The rush is to grab those returns while they last. Bond funds attracted 60% of all ETF flows in the first quarter, says State Street Global Advisors. And ultra-short funds attracted $25 billion in inflows, representing 60% of the money flowing into government bonds.

“Investor sentiment towards short-dated investment-grade bond ETFs is pretty strong,” Rosenbluth says.

Big returns, low risk

The most popular ultra-short-term bond ETFs

Sources: IBD, S&P Global Market Intelligence, ETF.com, Morningstar Direct

Follow Matt Krantz on Twitter @dull wreath

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