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Market for Ultra-Short Active Bond ETFs Grows

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What You Need to Know

  • BNY Mellon has filed an application with the SEC for an ultra-short actively managed bond ETF.
  • Vanguard launched an ultra short actively managed bond ETF in early April.
  • These ETFs act as a bridge between money market funds and short-term bond funds.

Competition is heating up in the ultra-short bond ETF space. Less than four weeks after  Vanguard launched an ultra-short bond ETF — its first active bond ETF — BNY Mellon announced it has filed an application with the Securities and Exchange Commission to introduce its own ultra-short bond ETF.

The BNY Mellon Ultra Short Income ETF Bond ETF, like the recent Vanguard entry and many  other ETFs in this space, will be actively managed. It will invest in a variety of ultra-short-term fixed income securities, but investments will be concentrated in the banking industry, with at least 25% of net assets invested in domestic or dollar-denominated foreign bank obligations. Assets will have an average A credit rating.

Fees were not disclosed in the SEC filing, but they will be competitive, said Stephanie Pierce, CEO of ETF, Index, and Cash Investment Strategies at BNY Mellon Investment Management.

The pending BNY Mellon Ultra Short Income ETF is one of four actively managed ETFs that BNY expects to introduce. It has filed with the SEC to offer a suite of three actively managed sustainable equity ETFs — for U.S., international and emerging markets — which are pending.

Ultra-short-term bond ETFs have been “extremely popular” and examples of where “active management has worked,” said Todd Rosenbluth, director of ETF and mutual fund research at CFRA. “They are a good alternative to money market funds if you’re willing to take on a slight bit of risk.”

Actively managed ultra-short-term bond ETFs are also a way for fund companies to use their in-house expertise to adjust bond allocations as market conditions change, including interest rates, Rosenbluth said.

He expects to see more ultra-short bond ETFs come to market due to growing demand as investors get more comfortable with these ETF products.

Ultra-short bond ETFs “make sense … in a low-interest-rate environment,” said Dave DiPetrillo, head of North American product development BNY Mellon Investment Management. “In a low-rate environment, clients are trying to balance liquidity, duration risk and yield-seeking.”

DiPetrillo noted that over $56 billion is in ultra-short active bond ETFs. “The clients’ demand is there.”

Year-to-date through March 31, assets in ultra-short-term bond ETFs totaled $98.5 billion while assets in their mutual fund counterparts totaled $246 billion, according to Morningstar. Actively managed funds accounted for 55% of the ETFs and 98% of the mutual funds.

Pierce noted that ultra-short bond ETFs optimize operating cash and strategic cash needs of investors, bridging the gap between money market funds and short-term bond funds — with more yield than the former and less volatility than the latter.

They are especially useful as an alternative to prime money markets, which may be subject to new, additional regulation, Pierce said.

The SEC in early February requested comment on potential changes to regulation of money market funds due to heavy withdrawals from U.S. prime money market funds — which invest in short-term company debt, including commercial paper — and from tax-exempt money market funds in March 2020. Heavy withdrawals exacerbated liquidity shortages in the fixed income market, which was ultimately rescued by the introduction of Federal Reserve liquidity facilities.