RESOLVING THE LEDGER
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See the full story · 1 sourcesMany investors are turning to short-term investments, particularly ultra-short bond funds , amid persistent concerns that the equity market is headed for an inevitable downturn and long-term bonds like the 10-year treasury are not providing the diversification benefits that they have provided within portfolios historically.
Stock market returns have been strong over the past decade, with the S&P 500 Index delivering double-digit gains for most of the past decade. The last several years have been especially robust, buoyed by the "Mag 7" technology stocks and the AI boom.
"Investors have enjoyed one of the strongest equity markets in history, and they're starting to get worried about downside risk," said Christopher Coolidge, chief investment officer at Brookwood Investment Group in Phoenix.
As investors take some money off the table, bank deposits are paying next to nothing with an average yield well under 1%, and long-term bonds are losing money in an uncertain rate environment. The iShares 20+ Year Treasury Bond ETF ( TLT ), for example, has posted an average annual return of negative 6.7% over the past five years, while its 7-10 Year Treasury Bond ETF ( IEF ) has posted an average annual decline of 1%.
Investors are looking for other safety trades to beat inflation. With their attractive yields and less downside risk, short-term investments are getting more attention.
Some financial professionals have been moving a larger portion of their clients' portfolios to cash-like investments. Brookwood Investment Group's model portfolios, for instance, generally consist of about 5% cash. That's up from about 2% in June. "We've become more defensive as equity markets continue to hit all-time highs," Coolidge said.
For the cash portion of their portfolios, Brookwood creates a basket of ultra-short ETFs, combining treasury exposure, floating rate securities, ETFs with active credit management and option-enhanced income strategies. A client can also opt to be 100% invested in the ultra-short basket for a little while, or even 50% or 20%, depending on their comfort level, Coolidge said.
Cyrus Amini, chief investment officer at Hyphen Wealth Management in Lafayette, California, also uses a combination of short-duration bond funds and money market funds for liquidity. "I don't see the need to take duration risk in this market," he said.
Often, when investors are concerned about the equity market, they look to bond funds, but there are concerns here too that go beyond the recent poor performance numbers. The long end of the bond market has become much more volatile amid inflation concerns, geopolitical fears and the belief that the Federal Reserve may have to raise rates before the end of the year, Coolidge said. Though recent inflation data , combined with unexpectedly soft jobs market data , have lowered the market odds that rate hikes are just ahead.
But ultra-short bond funds are proving popular as a short-term place to park money. These funds primarily invest in fixed-income securities with maturities typically under one year. This can include investments in government bonds, investment-grade corporate debt, asset-backed securities and commercial paper.
Ultra-short bond ETFs saw inflows of $12.8 billion in July, according to Morningstar Direct. These funds add slightly more yield than money market ETFs or mutual funds, with only a bit more risk, according to financial strategists. "The ultrashorts are adding anywhere from 75 to 110 basis points over money market ETFs with comparable duration and interest rate sensitivity," Coolidge said.
The best ultra-short bond funds to buy in 2026 include the Baird Ultra Short Bond Fund ( BUBIX ) and the JPMorgan Ultra-Short Income ETF ( JPST ), according to Morningstar .
Ultra-short bond funds still carry some interest rate risk. If that bothers investors, they can purchase money market ETFs or mutual funds instead. "It's all about your comfort level," said Brian Huckstep, chief investment officer of Advyzon Investment Management in Lisle, Illinois.
Money market ETFs are still relatively new, but they're gaining popularity. The first of these ETFs started trading in 2024, and there are only nine in the U.S., said Daniel Sotiroff, associate director of ETF and passive strategies research for North America at Morningstar Research Services. They're small compared with their mutual fund peers. Assets totaled $24 billion across the nine ETFs at the end of July, compared with $7.7 trillion held in money market mutual funds, according to Morningstar data.
Nonetheless, net flows into money market ETFs have been positive every month since inception except for June and July 2026, and they've been gaining traction, according to Morningstar Direct. From January through July, money market ETFs had net inflows of $18.7 billion, compared with $2.8 billion for money market mutual funds.
The largest money market ETF is the ProShares GENIUS Money Market ETF ( IQMM ). That fund had $17.4 billion in assets at the end of July, according to Morningstar Direct.
Here's a look at other stories offering insight on ETFs for investors.
The run-up in equities means that many investors' target asset allocations are off-kilter, Amini said, and he added that makes it a good time to be prudent about rebalancing to reduce portfolio risk. This could mean putting more into short-duration fixed income and money markets, with the idea that as long as the investments earn slightly above inflation, it's a win, Amini said. He's been spending more time with clients talking about locking in gains — incrementally taking some of the equity gains off the table and putting them in money market funds or ultra-short bond funds. "I would rather be more prudent ahead of time than worry about things once a potential drawdown has occurred," he said.
Another reason clients may want to shift out of equities is that their goals have changed. "If you plan to make a down payment on a house in eig...
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