The Invesco Ultra Short Duration ETF (NYSEARCA:GSY) and ETFs like it continue to be attractive picks in the current market. Employment data is so important to the current economic regime and to speculation around rates. The data has not been supportive of long-duration instruments, and in general there is no reason to take risks on duration with all the structural considerations being negative for the long-duration thesis. GSY and those like it are the correct sort of picks right now – in other words cash is currently king.
GSY Breakdown
The key data to know is that effective durations are below 1 year for GSY. The YTM, consistent with that time horizon, is over 6%. Expense ratios are somewhat low at 0.22%, which in terms of other lower duration ETFs is slightly on the high side, but given the ultra-low duration is reasonable considering there’s an active component in building a portfolio a low-duration corporate debt, including debt from markets corporate paper that is not going to be easily available to retail investors. International exposures, not just to the US, mean more value added and an expense ratio of 0.22% is even more worth it.
There is some credit risk, even though there’s no duration risk, and that’s why there’s about a 1% credit premium over the current corresponding risk free rate on the US yield curve. The actual premium is higher and more fair considering that the benchmark here would be an amalgamation of the yield curves in each of the allocated geographies. The credit risk is around the A to BBB rating. Investment grade but on the lower end.
Bottom Line
There is no duration risk. GSY will not suffer much if benchmark rates rise or expectations for benchmark rates to rise. The issue is that investors should be entirely prepared for continued rises in interest rates. The first reason is that the base effects are gone now and this last leg of inflation is the real deal. Tough to topple. The second reason is to do with the latest figures. In the current setup, the core perpetrators of the wage-inflation spiral are labourers, and therefore labour market data like employment are the key data to follow and the main catalyst for market reactions. With empty job openings rising alarmingly in the US, conditions of tight labour markets continue to point to a persistent factor for wage-inflation propagation. This is exactly the thing the Fed needs to deal with to complete its signaled mandate, and it hasn’t been dealt with almost at all. Rates will continue to rise, with downside in both bonds and stocks but upside in the USD and clean yield rolling over at attractive rates on low-duration instruments like GSY.
While GSY takes some credit risk, and while corporate earnings and stability will be hit with the 2024 and 2025 maturity walls, the credit premium seems somewhat reasonable. An ultra-low risk free portfolio might be a little better so as to be agnostic about the level of credit risk premiums, which broadly speaking are lower than historical averages. Nonetheless, employment resilience also means that real credit concerns are still not evident yet in the general consumer system.
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