With bank deposits yielding less than 1%, investors are increasingly turning to ultra-short bond funds to maintain liquidity while managing risk, driven by a shift in safe asset preferences amid volatile interest rates.
Investors who have recently banked gains in equities are increasingly parking the proceeds in ultra-short bond funds, as they look for a place to keep cash working without taking much market risk. CNBC reported that the appeal lies in a simple trade-off: bank deposits are still paying less than 1% on average, while longer-dated bonds can be volatile when interest-rate expectations are unsettled.
Advisers say the move is less about abandoning risk entirely than about shifting into assets that can be accessed quickly and that should fluctuate far less than ordinary bond funds. Brookwood Investment Group has lifted cash in its model portfolios to about 5% from roughly 2% in June, chief investment officer Christopher Coolidge said. The firm uses ultra-short exchange-traded funds that mix Treasury exposure, floating-rate securities, active credit management and options-based income strategies. Hyphen Wealth Management also relies on short-duration bond funds and money market funds to provide liquidity.
Ultra-short funds typically hold securities maturing in under a year, including government debt, investment-grade corporate bonds, asset-backed securities and commercial paper. Morningstar Direct data showed such ETFs took in $12.8 billion in July, while ETF.com said funds such as the iShares 0-3 Month Treasury Bond ETF and the SPDR Bloomberg 1-3 Month T-Bill ETF have been among the main beneficiaries of the rush into safe assets. Coolidge said these products can add 75 to 110 basis points over money market ETFs with similar duration and rate sensitivity.
The broader flow picture suggests the shift is not just a one-month reaction. The Weekly Investor said fixed-income ETFs had attracted more than $202 billion in net inflows in 2026, with ultra-short Treasury funds leading the group. At the same time, money market ETFs held only $24 billion across nine US funds at the end of July, compared with $7.7 trillion in money market mutual funds, according to Morningstar. Advisers warn, however, that investors should not try to retreat fully to cash or time the market. Cyrus Amini of Hyphen Wealth Management said rebalancing after equity gains can help reduce risk, while Mike Bisaro of StraightLine said stock exposure should depend on age, assets, liabilities and risk tolerance.
Disclaimer: This article is intended to inform and educate, not to recommend or endorse any financial product, investment or strategy. Please consider your own financial circumstances and seek professional advice where appropriate before making financial decisions.
