Mutual Fund
ICIVX
US Fixed Income Invesco Conservative Income Fund
Inception Date:
04/02/2018
Money market and liquidity
Allocating cash: Three reasons to consider ultrashort bond funds
December 8, 2023
Key takeaways
Higher yield potential
The yields for ultrashort bond funds are competitive with, or higher, than other cash yields, such as on money markets.
Higher return potential
Ultrashort returns equaled or exceeded money market and Treasury bill returns in 2023 despite rate hikes.
Timing is important
Waiting until the Fed eases and yields are low has not been the best time to consider ultrashort bonds.
Allocating cash: Three reasons to consider ultrashort bond funds
If you’re looking to maximize yields and return potential on the cash portion of a client’s portfolio, now’s a good time, in our view, to consider actively managed ultrashort bond funds. They seek to provide higher yields and total returns compared to money market funds and other cash alternatives. They may be especially useful for investors who can extend the duration of their cash investments slightly. Here are three reasons to consider active ultrashort bond funds for a cash allocation.
1. Extend duration to potentially lock in higher yields than those offered by cash instruments
The yields for active ultrashort bond funds are competitive with, or higher than, other cash yields, as represented by the Treasury Bill Index, which yields Short Term 5.29% as of Nov. 24, 2023. For example, the SEC 30-day yield is 5.30% for Invesco Short-Term Treasury ETF (TBLL), 5.59% for Invesco Conservative Income Fund (ICIFX), 5.59% for the Invesco Ultra Short Duration ETF (GSY), and 6.30% for the Invesco Variable Rate ETF (VRIG), as of Nov. 24, 2023.1 Additionally, actively managed ultrashort funds offer investors the opportunity to invest in a more diverse, higher yielding array of assets including corporate bonds and structured securities. (Sources: Invesco and Bloomberg.)
2. Ultrashort returns stayed competitive despite rate hikes
As the chart below shows, ultrashort returns approximated money market and Treasury bill returns in 2023 despite 100 basis points of rate hikes by the Federal Reserve (Fed). Plus, in 2019, the last time short-term rates peaked and subsequently fell, returns for ultrashort funds beat money market funds and Treasury bills. Gaining some duration from locking in yields paid off for several years after the peak in rates.
Ultrashort remained competitive during past Fed tightening and easing
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1
Per the current prospectus...etc. Total expense ratio for Invesco Variable Rate Investment Grade ETF (VRIG) is 0.30%; Invesco Ultra Short Duration ETF (GSY) is 0.22%; Invesco Short Term Treasury ETF (TBLL) is 0.08%; Invesco Conservative Income Fund (institutional class) is 0.27% and Invesco Government Money Market (Cash Reserve Shares) is 0.47%. Effective after the close of markets on Aug. 25, 2023, the Invesco Treasury Collateral ETF (CLTL) changed to Invesco Short Term Treasury ETF (TBLL). No other changes were made to the Fund. See the prospectus for more information.
For standardized performance, click here for mutual funds; click here for ETFs; Click here for money market funds.
Performance quoted is past performance and cannot guarantee comparable future results; current performance may be lower or higher. Visit invesco.com/performance for the most recent month-end performance. Investment return and principal value will vary so that you may have a gain or a loss when you sell shares. Fund performance reflects any applicable fee waivers and/or expense reimbursements. Mutual fund performance figures reflect reinvested distributions and changes in net asset value (NAV) and the effect of the maximum sales charge unless otherwise stated. Had fees not been waived and/or expenses reimbursed currently or in the past, returns would have been lower. Index returns do not reflect any fees, expenses or sales charges. An investment cannot be made into an index. Invesco Conservative Income Fund Institutional Class shares have no sales charges; therefore, performance is at NAV. Invesco Conservative Income Fund Institutional Class incepted on July 1, 2014. Returns less than one year are cumulative; all others are annualized. ETF market returns are based on the midpoint of the bid/ask spread at 4 p.m. ET and do not represent the returns an investor would receive if shares were traded at other times. As the result of a reorganization on April 6, 2018, the Invesco Ultra Short Duration ETF returns presented reflect performance of the Guggenheim predecessor fund. Invesco is not affiliated with Guggenheim.
3. Waiting until yields are low may not be the best strategy
Historically, investors in ultrashort strategies have been slow to respond to Fed easing, waiting until their cash-based yields are notably lower than ultrashort yields. By that time, much of the extra total return was missed. This happened in the Fed easing cycles in the early 2000s and 2007-2008.
Investor interest in ultrashort has lagged Fed easing
Conclusion
While the bond market has been challenging in 2023, extending out some cash balances in ultrashort bond funds is compelling, in our view. Invesco utilizes the breadth of its Global Liquidity, Investment Grade Credit, and Structured Investments teams’ capabilities to build ultrashort portfolios that can help position short-term bond portfolios.
