The search for yield has been a persistent and vexing challenge for anyone charged with managing money. But what are the options? How far out the curve do you have to go to find suitable opportunities? And how do you balance your yield appetite with potential credit and duration risk?
One option is the ultra-short duration bond fund (mutual funds and ETFs). They generally have duration exposure of less than one year--compared to "short-term" bond funds with duration exposure of one to three and one-half years. Ultra-short duration funds offer investors a way to enhance yield over other money market securities, while maintaining flexibility and liquidity, and limiting duration risk. Fund managers use a broad mix of primarily investment-grade assets to deliver higher income while maintaining low duration, which positions these funds to react to a rising interest rate environment. Limiting duration exposure, because it reduces price sensitivity, may also help reduce NAV volatility.