Investors Turn to Ultra-Short Bond Funds as Equity and Long-Term Bond Risks Rise

Amid persistent worries that the equity market may soon reverse its decade-long rally and that long-term Treasury bonds are delivering negative returns, investors are reallocating toward short-duration fixed-income products. Brookwood Investment Group now holds roughly 5 % cash in its model portfolios—up from about 2 % in June—by using a basket of ultra-short exchange-traded funds (ETFs) that combine Treasury exposure, floating-rate securities, actively managed credit, and option-enhanced income strategies. Cyrus Amini of Hyphen Wealth Management echoes the approach, favoring short-duration bond funds and money-market vehicles for liquidity.

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The S&P 500 has generated double-digit gains for most of the past decade, propelled by “Mag 7” technology stocks and the AI boom. Yet analysts note that the long end of the bond market has become volatile due to inflation worries, geopolitical tensions, and expectations that the Federal Reserve could raise rates before year-end. These dynamics have eroded the diversification benefits historically offered by 10-year Treasuries, whose recent performance includes a -6.7 % average annual return for the iShares 20+ Year Treasury Bond ETF (TLT) over the past five years and a -1 % decline for the 7-10 Year Treasury Bond ETF (IEF).

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• Ultra-short bond ETFs attracted $12.8 billion of net inflows in July, according to Morningstar Direct.

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• These funds typically add 75 to 110 basis points of yield over comparable money-market ETFs, per Brookwood’s chief investment officer.

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• Money-market ETFs, first launched in 2024, hold $24 billion across nine U.S. products at the end of July, versus $7.7 trillion in money-market mutual funds (Morningstar data).

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• Bank deposit yields remain under 1 %, prompting investors to seek higher-yielding, low-risk alternatives.

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Christopher Coolidge, chief investment officer at Brookwood Investment Group, said the firm has become more defensive as equity markets continue to hit all-time highs and that ultra-shorts provide a modest yield premium while limiting duration risk. Brian Huckstep, chief investment officer of Advyzon Investment Management, emphasized that investors should choose products that match their comfort level, noting that money-market ETFs offer a rate-risk-free option for those wary of interest-rate exposure.

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• “We've become more defensive as equity markets continue to hit all-time highs,” — Christopher Coolidge, chief investment officer at Brookwood Investment Group in Phoenix

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• “The ultrashorts are adding anywhere from 75 to 110 basis points over money market ETFs with comparable duration and interest rate sensitivity,” — Christopher Coolidge, chief investment officer at Brookwood Investment Group in Phoenix

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• “It's all about your comfort level,” — Brian Huckstep, chief investment officer of Advyzon Investment Management in Lisle, Illinois

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