Investing – Review of USAA Ultra Short Term Bond Fund (UUSTX)

My basic investing thesis is this: The stock market is a scam and interest rates are too low.  So what is an average retail investor such as myself to do?  I don’t want my money sitting around earning 0.01% in a money market fund and I don’t want everything locked up in certificates of deposits.  Stocks were cheap back in 2009, but seem way over valued now.

The answer I found was to invest some money in a short term bond fund.  If you are not familiar with how bonds work, it is important to know a few basic things:

  • A bond is basically a loan between someone with money and someone that wants it
  • Basic bonds need at least three things:
    • A specific amount borrowed (the “face value”)
    • A set maturity date, or for how long the money is borrowed
    • set interest rate (known as the “coupon rate”)
  • Generally speaking:
    • The longer the term of the bond the higher the interest rate
    • This is designed to compensate the lender for the risk of default and the risk of inflation
  • The value of a bond however can fluctuate over time as the markets perception of default risk and inflation risk changes

Knowing the above is useful, but the most important thing to know is that the price of an existing bond changes inversely to the rate of interest it pays.  That is to say, as interest rates go up, bond prices go down.  This is very important for investors in bond mutual funds and ETFs as the NAV or share value of the fund will go down as interest rates go up and vice-versa.

Since I believe interest rates will rise (or at least they should, if Ben Bernanke would stop kicking the can down the road and making things worse) I do not want to own long-dated bonds.  That is because these bonds will drop in value faster and further as rates go up than will short dated bonds.

Fund overview

In my search for a suitable investment, I started looking at short term bond funds.  The problem I had was that most funds that claim to be “short term” actually had average weighted maturities of 3 to 7 years.  That was way to long for my tastes.  Additional, the rate of interest they paid was in my opinion simply not high enough to offset the risk of future inflation or default risk.  Continuing my search, I came across a relatively new fund: The USAA Ultra Short-Term Bond Fund.

Why I like it

I like this fund for a few reasons:

  1. It’s USAA and they have always been an excellent company to deal with and I have never had a problem with anything they have sold me.

  2. The objectives of the fund align nicely with my outlook and goals:

    “Today’s low interest rate environment and concerns over possible future inflationary pressures have left investors searching for investment alternatives. Maximizing income and yield with share-price preservation remains a challenge for many investors. Therefore, in order to provide a solution for our members, we decided that now was an appropriate time to introduce the USAA Ultra Short-Term Bond Fund into our fund family lineup.”

  3. The fund will at least 80% of its assets in bonds with durations of 18-months or less

  4. During the new funds introductory period, it has a reduce management fee which is just 0.60%
  5. The performance is has been better than a savings account, with a year-to-date return of 1.27%

 

Risks to consider

Like all investments, this one includes risk.  The price of the fund could drop if interest rates rapidly.  The fund could also be mismanaged or have large defaults, both of which could reduce the share price.  Because the fund invests in short term bonds, the interest rate risk should be reduced.

Be sure to read the prospectus before investing.

 

Important Note: This fund is not FDIC Insured and is not Bank Issued, Guaranteed or Underwritten.  This fund may lose value.  Investing in securities products involves risk, including possible loss of principal.  As interest rates rise, existing bond prices fall.

Disclosure: I own this shares of this fund and contribute to it monthly via an automated savings plan.  Invest at your own risk.

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