Short ETF or short term exchange traded funds are those funds that track the performance of short term debt securities. These are securities such as treasury notes with maturities of 1 to 3 years and treasury bills with maturities of up to 12 months. The funds are mostly based on the indices that track treasury notes since you will often find treasury bills inside money market funds. These funds provide a level of safety and stability for an investment portfolio since they are based mainly on government issued securities that are backed by the full faith and credit of the U.S. government.

What are ETFs?

ETFs are based on market performance of the index tracking the asset. There are no guarantees associated with investment returns and there is a potential for loss when investing in a short ETF that is no different than investing in any other type of security. There are advertisements that suggest that an ETF is the safest way to guarantee a return. Such a statement is both false and misleading because you can lose money with an ETF, just as you can with any other type of investment.

Where Short ETFs Are Appropriate

Short ETF investing is important for those individuals looking for steady investment returns and a low risk profile. Unlike more high flying counterparts such as commodity based ETFs (such as gold, oil or natural gas) or those ETFs that invest in overseas markets, short term ETFs based on treasury notes are fairly conservative. An investor that needs to protect their principal investment by preserving capital and receive some income potential would be ideal for these types of instruments. The investment time horizon for such a period perfectly matched the aims of a short ETF.

ETFs Entail Investment Risk

ETFs hold inherent risks, including the risk of loss of the principal amount invested. This risk should be evaluated when making the decision to purchase a short ETF (or any other exchange traded fund). ETFs are subject to the same risk as any other investment, no matter how safe it is designed.

A Short ETF Investment Strategy

A short ETF can be a part of most every investment portfolio where there is a desire to maintain a hold on some of the principal investment amount. The percentage of an investment held in short ETFs depends on the investment time horizon of the investor as well as their investment goals and objectives. A careful review of any documents associated with the short ETF including the prospectus or offering document should provide good insight as to what to expect and whether the short ETF meets the investment objectives of the investor. 

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