Ultra Short Duration Bond Funds are mutual funds or exchange-traded funds (ETFs) that invest primarily in fixed-income securities with a short-term maturity, typically ranging from three months to one year. These ETFs offer a lower-risk investment option with higher return potential than traditional savings accounts or money market funds.

Ultra Short Duration Bond ETFs can be a useful addition to a diversified investment portfolio for several reasons:

1. Reduced Interest Rate Risk: Since these ETFs hold fixed-income securities with short maturities, they are less sensitive to changes in interest rates. This means that the value of these ETFs is less likely to be impacted by fluctuations in interest rates, which can be a significant risk for longer-term bond funds.
2. Lower Credit Risk: Ultra Short Duration Bond ETFs typically invest in high-quality, investment-grade bonds, which have a lower risk of default compared to lower-rated or non-investment-grade bonds. This means that investors in these funds may be less likely to experience a loss of principal due to default.
3. Increased Liquidity: The short-term nature of the bonds held by Ultra Short Duration Bond ETFs means that these funds have a higher level of liquidity than longer-term bond funds. This may make it easier for investors to buy and sell shares of the fund without experiencing significant price fluctuations.
4. Potential of Higher Returns than Money Market Funds: Ultra Short Duration Bond ETFs may offer higher returns potential, while still maintaining a relatively low level of risk.

In terms of investment strategy, Ultra Short Duration Bond ETFs typically invest in a mix of fixed-income securities, including U.S. Treasury bills, certificates of deposit (CDs), commercial paper, and short-term corporate bonds. These funds may also use strategies such as interest rate swaps or derivatives to manage risk and enhance returns.

Key use cases for retail investors include:

1. Diversification: Adding Ultra Short Duration Bond ETFs to a portfolio can help diversify the overall investment mix and reduce risk. Since these funds have a lower correlation to equities, they can help to balance out the risk and return profile of a portfolio.
2. Short-Term Goals: For investors with short-term financial goals, such as a down payment on a house or a child's education, Ultra Short Duration Bond ETFs can offer a lower-risk way to earn a return on their investment while still having access to their money in the near future.

An Ultra Short Duration Bond ETF for Canadian Investors

Investors interested in Ultra Short Duration Bond ETFs should consider the Franklin Bissett Ultra Short Bond Active ETF (FHIS), a new investment option that focuses on short-term bonds that mature quickly. This strategy is designed to reduce risk in case interest rates go up while potentially offering a good yield. Almost 50% of the portfolio is invested in short-term money market paper, like Banker’s Acceptance notes, which can help manage your investment during interest rate changes. The investment team uses these notes to increase the yield of the portfolio while aiming to keep risk low. With a relatively low management fee of 0.15%, FHIS offers an inexpensive and effective investment option to consider for your portfolio.

In summary, Ultra Short Duration Bond ETFs can be a valuable addition to a diversified investment portfolio for retail investors. These funds offer reduced interest rates and credit risk, increased liquidity, and higher return potential than money market funds. They can be used for diversification and short-term financial goals.

IMPORTANT INFORMATION All investments involve risks, including possible loss of principal. Interest rate movements, unscheduled mortgage prepayments and other risk factors will affect the fund’s share price and yield. Bond prices, and thus a fund’s share price, generally move in the opposite direction of interest rates. Thus, as the prices of bonds in the fund adjust to a rise in interest rates, the fund’s share price may decline. These and other risks are discussed in the fund's prospectus. ETFs trade like stocks, fluctuate in market value and may trade at prices above or below their net asset value. Brokerage commissions and ETF expenses will reduce returns. Your clients should carefully consider a fund’s investment goals, risks, charges and expenses before investing. They should read the summary prospectus and/or prospectus carefully before they invest or send money. To obtain a prospectus, which contains this and other information, please visit franklintempleton.com or call Franklin Templeton at (800) DIAL BEN/342-5236. ETF shares may be bought or sold throughout the day at their market price, not their Net Asset Value (NAV), on the exchange on which they are listed. Shares of ETFs are tradable on secondary markets and may trade either at a premium or a discount to their NAV on the secondary market.