Ultrashort Bond Funds: Are They Ultrasafe?; These funds are favorites again, five years after big losses.
With short-term interest rates remaining locked near zero, yield-starved investors have been turning to "ultrashort" bond funds as a safe place to stash their cash. Attracted by yields on ultrashort funds ranging mostly between 0.2% and 1.3%, investors shifted $9.6 billion into the group during the first seven months of 2013, according to Morningstar Inc.</br></br>Fund companies, meanwhile, have been rolling out new offerings, including ultrashort exchange-traded bond funds.</br></br>These funds, which invest in bonds typically maturing in less than one year, are likely to suffer smaller losses than other bond funds when interest rates rise. Yet investors need to remember that they can lose money; they're not a money-market substitute. And within the group there's a range of strategies carrying different risks.</br></br>Some investors with a long memory may recently have gotten a reminder of how ultrashort bond funds can fail to protect investor money: Last month, Charles Schwab Corp.'s fund unit filed with regulators to offer a series of ultrashort ETFs. The Schwab YieldPlus mutual fund lost 35% during the financial crisis in 2008, resulting in the company agreeing to pay a $119 million fine to settle civil charges from the Securities and Exchange Commission that it had allegedly misled investors about the safety of the fund. (Schwab didn't admit or deny guilt.)</br></br>It's unclear from the new filings how the ETFs will differ from the YieldPlus strategy. A Schwab spokeswoman says the strategies are different from "other Schwab funds and ETFs currently or previously offered." But she declines to comment further, citing the "quiet period" around the fund filings.