Ultrashort-Term Bond Funds

The Advantages and Disadvantages of Ultrashort-Term Bond Funds

A woman choose ultra-short bond investments for her portfolio using her computer.

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People who want to invest for short-term returns have many options. Bond funds that have a short term can be smart choices for people who want better short-term returns than money market accounts but less market risk than bond funds with longer terms.

Before you buy, you should know the pros and cons of this fixed-income investment type. You should also know how to spot the best market conditions for short-term investing.

Key Takeaways

  • Ultrashort-term bond funds can be a good choice if you want a chance for better short-term returns than money market accounts.
  • These very short bond funds typically invest in bonds that mature in less than one year.
  • Because they are less touchy where interest rates are concerned, some people like to use the shortest bond funds when rates are rising.

What Are Ultrashort-Term Bond Funds?

Ultrashort-term bond funds, which often invest in bonds that mature in less than one year, are grouped with short-term bond funds, which hold bonds that mature in one to three years. Return rates for ultrashort-term bond funds are often higher than money market funds but lower than conventional short-term bond funds.

People who like to invest low risk tend to like ultrashort-term bond funds because they have fewer interest-rate change worries than short-term bond funds. They will often have higher returns than money market funds. Still, these bond funds have lower average returns over the long run than short-term bond funds and much lower returns than intermediate-term bond funds and long-term bond funds.

Best Time to Buy Ultrashort-Term Bond Funds

As the name implies, these bond funds are not meant for long-term investing and performance. For instance, a total bond market index fund would be expected to have a return of around 5% over a 10-year span, while an ultrashort-term bond fund would do well to average 2%.

Still, bond mutual funds have principal risks. This means that you could sell a bond fund for a lower value than you bought it. When rates are rising, this risk goes up because of a market risk type called interest rate risk. When rates are low, people want to get a yield that's higher than money market funds. If rates are expected to rise in the near future, the shortest bond funds can be a good idea.

Other than the potential for error in predicting the movement of rates, these bond funds are best suited for investing over a relatively short span of time, such as three to six months.


The best time to invest in ultrashort-term bond funds is when interest rates are expected to rise. For investors looking for a wise plan to invest in these bond funds, a proper time frame is less than one year.

On the other hand, if rates are high at the moment or expected to fall soon, a short-term bond is not as smart of an investment as a bond with a longer maturity. Long-term bonds are less subject to adverse effects from near-term rate ups and downs.

Best Ultrashort-Term Bond Funds

If you want to use ultrashort-term bond funds as they were meant to be used and invest for a short span of time, the best of these funds will have no load and will have a low expense ratio. One of the best of these bond funds to buy is Vanguard Ultrashort-Term Bond (VUBFX), which has a low expense ratio of 0.2% and performs in a way that often tops most funds with similar holdings. The Bloomberg Barclays 1–3 month T-Bill ETF is one more great option. It has an expense ratio of under 0.14%.

To find similar funds, you can research and find the best ones on one of the many websites for learning about mutual funds. Just be sure to look for low expense ratios and good historical performance records.

The Bottom Line

Put simply, the shortest bond funds are best for investment plans with less than a one-year span. This is because the returns for these funds tend to be much lower than short-, intermediate-, and long-term bond funds. Because these bonds don't really react to rate changes, some people like to use these bond funds when rates are rising. They may not be a smart place to put your money when rates are high and at risk of falling, though.

As with any investment, how the market is doing at the time you invest should play a major role in helping you decide on your plan.

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  1. Barrons. "New Ways to Generate Income From Cash."

  2. U.S. Securities and Exchange Commission. "Ultra-Short Bond Funds: Know Where You’re Parking Your Money."

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