What are Ultra-Short bond funds? They are a niche product which hold bonds with an average maturity that is longer than Money Market Funds and shorter than Short-Term Bonds. The idea is that for taking on a little bit more interest rate risk than a money market fund, you will receive a moderate degree of additional yield.
Many people get confused between Money Market Funds (offered by brokerage firms) and Money Market Accounts (offered by banks). The most important difference is that Money Market Accounts are FDIC insured so you cannot lose money, and Money Market Funds are not. There is much confusion about this issue and the SEC has been making efforts to educate the public.
The confusion primarily stems from the fact that Money Market Funds always sell their shares at $1. However, the market value of the assets which a share represents can often be slightly above or below $1. Ultra-Short Bond funds are bought and sold for their actual Net Asset Value.
Money market funds must have have an average maturity of 90 days or less. The portfolios of ultra-short bond funds tend to have average maturities between 3 months and a year. By being able to buy longer dated debt, these funds are able to take advantage of the upward slope of the yield curve. The longer the maturity date, the more yield one can earn.
What is an investor to do with their cash to earn some extra interest? You are likely to receive the highest interest rate with the lowest risk from a bank. Funds placed in a savings account or money market accounts, offer the FDIC protection – government protection against loss of funds, no annual expense ratios, and fairly easy access to funds. And if you are willing to move your funds around every six months to take advantage of “promotional rates” interest rates are comparable to ultra-short bonds funds.