Short-term bond exchange-traded funds (ETFs) are a practical option for conservative investors looking to strike a balance between safety and income.
These funds typically invest in bonds maturing in one to three years, making them less volatile than traditional bond funds and more rewarding than money market funds -- at least when the yield curve isn't inverted.
For those seeking a low-risk place to park cash, earn modest returns, and keep access to liquidity, short-term bond ETFs can play a valuable role as a portfolio stabilizer without the complexity or cost of owning individual bonds.
Best short-term bond ETFs in 2025
In this article, we're covering five of the best short-term bond ETFs for 2025, focusing on the ones that are large, cheap, diversified, and easy to trade. We'll also walk through how each fund builds its portfolio, the types of bonds it holds, and a few key nuances to be aware of before investing.
1. Vanguard Short-Term Bond ETF (BSV)
2. Schwab Short-Term U.S. Treasury ETF (SCHO)
NYSEMKT: SCHO
Key Data Points
Risk-averse investors may prefer a short-term bond ETF like the Schwab Short-Term U.S. Treasury ETF (SCHO +0.08%) over broader options like the Vanguard Short-Term Bond ETF.
That’s because this ETF sticks strictly to U.S. Treasury securities, which carry virtually no credit risk. Treasuries are backed by the full faith and credit of the U.S. government, making them about as safe as fixed income gets, short of a government default.
This ETF tracks the Bloomberg U.S. Treasury 1-3 Year Index, resulting in an average portfolio duration of 1.9 years. That translates to less price sensitivity when interest rates move.
The 30-day SEC yield is currently 3.57%, which is a bit lower than that of the Vanguard ETF, but that's to be expected, given its lower risk and the absence of corporate bonds in the portfolio.
3. First Trust Limited Duration Investment Grade Corporate ETF (FSIG)
4. SPDR Bloomberg Short-Term High-Yield Bond ETF (SJNK)
5. iShares Short-Term National Muni Bond ETF (SUB)
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Pros and cons of investing in short-term bond ETFs
Pros
- Lower downside risk during periods of rising interest rates compared to intermediate or long-term bond ETFs.
- Highly liquid, making it easier to buy and sell than individual short-term bonds.
- When short-term rates are elevated, these ETFs can offer attractive yields relative to their risk.
Cons
- Total after-tax returns can fail to keep pace with inflation over the long term, eroding purchasing power.
- Limited potential for price appreciation if interest rates are cut, unlike longer-term bonds.
- Most short-term bond ETFs can’t be held to maturity, so investors don’t have the guaranteed principal repayment of an individual bond.
Should I invest in short-term bond ETFs?
As always, deciding whether to invest in any ETF starts with identifying goals that your current holdings may not meet. If your aim is to minimize interest rate sensitivity and hold a relatively safe investment that’s insulated from stock market volatility while still earning modest income, a short-term bond ETF could be a good fit.
From there, it’s about choosing the right type.
- If safety is your top priority, stick with Treasury ETFs.
- If you're a high earner investing in a taxable account, a municipal short-term bond ETF may be more appropriate.
- If you're focused on maximizing monthly income and are comfortable with more credit risk, a short-term, high-yield bond ETF could suit your needs.
- If you want broad, balanced exposure to both government and corporate bonds, consider an aggregate short-term bond ETF.
Regardless of which option you choose, the key to making short-term bond ETFs work in your portfolio is keeping fees low and, where possible, holding them in a tax-sheltered account.
