Subprime Woes Hit Some Ultra-Short Bond Funds

The Fidelity Ultra-Short Term Bond Fund, which was a mainstay on our Best Rates tables recommendation list in 2004-2006, was in the news recently, named as one of the ultra-short term funds that has taken some hits due to the current mortgage lending woes in the "subprime" segment of the market (see I Couldn't Help It. I Can Resist Anything Except Temptation.). From The Wall Street Journal:

Fidelity Ultra-Short Bond fund was down 3.5% for the month ending August 21, while the average ultrashort bond fund lost 0.45%, according to investment-research firm Morningstar Inc. Fidelity Investments said several factors, including subprime-mortgage securities, hurt the fund's recent performance. In contrast, short-term bond funds—which are supposed to be slightly more risky than ultrashort funds—gained 0.47% in the period, according to Morningstar. . . .

Since ultrashort bond funds invest in longer-duration instruments than do money-market funds, they often provide better returns. Ultrashort funds have barely outpaced money-market funds in the 12 months through July. Ultrashorts are up 4.59% in that period, while retail money-market funds are up 4.55%, according to Lipper.

The two ultra-short term funds that have been on our recommended list since January are Schwab Yield Plus (SWYPX) and Touchstone Ultra-Short (TSDOX), the latter now being closed to new investors. For the most part, they have managed to avoid significant subprime-related losses up to now. For those particularly concerned about the situation and want greater safety going forward, a move to money market funds should relieve your anxiety. If you want to stay with ultra-shorts, the AAA-rated portfolio of the Managers Short Duration Government Fund (MGSDX) is worth a look.

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