Many savers turn to certificates of deposit (CDs) for income, but those can come with some drawbacks. Sure, your principal is FDIC-insured, and your interest rate is locked in. So there's a predictability and safety with CDs that you can't find in other segments of the fixed income market.
The trade-off for that is usually a lower yield. The national average rate for a 12-month CD is somewhere between 1.5% and 1.6%. You can find higher yields than that in some places, but they may come with high minimums, penalties, or fees.
The ETF marketplace solves a lot of those hang-ups. The variety of offerings in the fixed income space means you can easily find low-risk funds with yields of up to 4% or more that come with minimums or lock-in periods. The only thing that these ETFs don't come with is FDIC insurance.
Image source: Getty Images.
But if you're OK with that, you can double your income and keep full access to your money whenever you need it.
Investing in ultra short-term fixed income ETFs comes with the potential for some share price fluctuation as well. They're not risk-free, and there is a chance that your principal value could decline in the wrong conditions. But that risk is often pretty minimal, and any share price declines are usually offset by the income generated by the fund.
If you're considering improving your income potential, look at these fixed income ETFs.
1. iShares 0-1 Year Treasury Bond ETF
The iShares 0-1 Year Treasury Bond ETF (SHV +0.00%) is your pure Treasury bill option. These bills aren't guaranteed like a CD, but they're backed by the full faith and credit of the U.S. government. That makes them as safe as you'll find without an actual guarantee.
NYSE: SHV
Key Data Points
Historically, this fund has experienced almost no share price volatility. The biggest drawdown it experienced was during 2021-2022, when the Fed was aggressively raising interest rates to fight inflation. Even in that severely adverse environment, it only lost 0.4% of its value. In the fixed income space, ultra short-term Treasury bills are about the safest investment you can find.
Currently, this ETF is yielding 3.5%, giving it a significant income advantage over most CDs.
2. WisdomTree Floating Rate Treasury ETF
The WisdomTree Floating Rate Treasury ETF (USFR +0.00%) is similar to the fund above, but is structured slightly differently. Instead of fixed-rate Treasury bills, this ETF invests in short-term floating rate Treasury notes.
NYSEMKT: USFR
Key Data Points
With floating rate notes, the maturities may be longer, but the rates on them reset regularly, typically every week. Because of that, they come with very little interest rate sensitivity. Since they're issued by the U.S. Treasury, they also have virtually no credit risk. That combination makes the share price on this fund incredibly stable and one of the best sources of safe, predictable income.
Currently, this ETF is yielding 3.6%.
3. Janus Henderson AAA CLO ETF
The Janus Henderson AAA CLO ETF (JAAA +0.04%) comes with a significantly higher yield than either of the ETFs mentioned already. But it's important to be clear that it's not anything like the other funds, either.
This fund doesn't invest in bonds. It invests in collateralized loan obligations (CLOs), which are essentially baskets of loans originated by banks. These loans are typically made to lower-rated borrowers, but they're often grouped together by credit rating so investors can get a better handle on the product's credit profile.
NYSEMKT: JAAA
Key Data Points
In the case of this ETF, it only invests in the very highest AAA-rated tier, making credit risk almost non-existent. CLOs are floating-rate, so they also come with little interest rate risk. What's in this ETF is very different from what's in a traditional bond fund, but the similar credit and interest rate risk profiles make them behave very similarly to the funds already mentioned.
Currently, this ETF is yielding 4.8%.
Why does this ETF have such a higher yield if its credit and rate profile is almost identical to the others'? In many cases, CLOs are less liquid than traditional bonds. Because of that lack of liquidity, there is the possibility that they're not as easy to trade if market conditions begin to deteriorate. Investors demand a higher yield for that additional risk. If you're looking for ultra-safe income, this ETF will often deliver. But as with other funds, there are no guarantees.
