Short-Lived Spiders

A new spider has just come to town. The SPDR Lehman 1-3 Month T-Bill ETF (AMEX: BIL) is the shortest-duration fixed-income ETF currently available. BIL has a very low and competitive 0.13% expense ratio, which makes it an inexpensive place to park cash or earn some low-risk returns.

As expected, BIL has a very short duration of 0.16 years, and the credit quality of the fund's holdings is a rock-solid triple A. The fund tracks the Lehman Brothers 1-3 Month U.S. Treasury index, which includes all publicly issued zero-coupon U.S.Treasury Bills with a remaining maturity of less than three months and more than one month.

Competition
There are two competing ETFs that a short-term fixed-income investor might consider in addition to BIL. However, there is a big gap between the average duration of BIL and these two funds, so they might draw different investors. Even if the funds compete head-on, the new SPDR might turn out to be very successful, especially if the older funds are any indication.

The first competitor is the iShares Lehman 1-3 Year Treasury Bond Fund (AMEX: SHY) which has both a higher expense ratio of 0.15% and a longer duration of close to two years. SHY has gathered close to $6 billion in assets since coming to market roughly five years ago. The second option, the Vanguard Short-Term Bond ETF (AMEX: BSV), has the lowest expense ratio of the group, at 0.11%, but has a much higher average duration of 2.38 years. BSV has been popular with investors, who have committed $5.5 billion to the fund.

A short-term focus is good
Although there currently aren't many fixed-income ETFs (especially short-term funds), that is changing as more funds continue to be listed. This year alone, the number of fixed-income ETFs has more than quadrupled. There are now fixed-income ETFs from three sponsors -- Barclays, SSGA, and Vanguard.

The advantage of short-term fixed-income ETFs is that they can serve as an alternative to money market funds. Short-duration fixed-income ETFs can minimize interest rate risk and can also provide better returns than money market funds. The low expense ratio of ETFs can make these products very competitive, and their liquidity can be attractive to some investors. These funds could be just the place to park your cash while looking for investment opportunities, or they could serve as a safe and low-risk investment.

Not for everyone
Short-term fixed-income ETFs are not for every investor. For some, the loss in expected returns is just not worth it. Before investing in a fund like BIL, you should take a look at your income requirements and your risk tolerance. If you can stomach volatility and the potential of high returns, this fund is probably not for you. However, if you want low risk and stable returns, BIL might be just what you want.

Fool contributor Zoe Van Schyndel lives in Miami and enjoys the sunshine and variety of the Magic City. She does not own any of the funds mentioned in this article. The Motley Fool has a disclosure policy.