I know, I know. Short-term bonds? Like big investments? Blasphemy, right? But listen to me. I think there’s more than a slim chance that between all those fancy covered call ETFs, closed-end funds with double-digit yields, and dividend stocks that “should” rebound in 2026, the year could belong to some of the dullest ETFs on planet Earth.
I will name names below. First, let me explain why ETFs holding US Treasuries with maturities between 1 and 7 years could surprise some people in 2026.
The economy heading into the new year is a disaster. At least if you listen to all the financial talk I do on a daily basis. One thing that worries me is that the same people who brag about how good the economy is also Want a stimulating rate cut? What are we doing here?
I am a technician and do not believe in broad political or even economic approaches to evaluating markets. I look at photos all day. Images of price trends, in stocks and ETFs, as well as the “main” market indices. And what I see is a high risk for the stock market. And a boost from enough sources of big money to guide short-term interest rates down.
In summary, there are two different reasons why US short-term rates may decline in 2026, perhaps significantly.
The people who say “we need lower rates” want it and have the potential to get it. This is a mix of government officials who have a bunch of T-bills maturing in the next 12 months and needing refinancing, and investors who want infinite QE (cheap money forever, better for speculation). And with the upcoming arrival of a new Federal Reserve chairman, there is the will to do so.
If the economy falls into recession (a word that, in my opinion, is not said enough these days, given the progressing K-shaped economy), that alone will be an easy path to lowering rates. Stimulate the economy because it really needs to, not because people on Wall Street need to go into more debt to get more leverage.
So, that’s my case in summary. And while longer-term stocks and bonds are potentially winners in that scenario, both carry more risk than ETFs like this pair and others like it.
The two I’m focusing on are iShares 1-3 Year Treasury Bonds (SHY) and iShares 3-7 Year Treasury Bonds (IEI). They are both in my unofficial “ETF hall of fame” for how they rescued me in past market cycles.
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I’m a big fan of inverse ETFs, which help us directly benefit from falling stock prices. But this pair, when conditions are right, as they could be in 2026, will have all this going for them:
Long-lasting (SHY debuted in 2002, IEI in 2007). They have survived some tough stock and bond markets.
Low cost (negligible expense ratios, so that doesn’t get in the way)
Less volatile by nature, given shorter maturities. I compared them both in the table above against a standard bond benchmark.
High quality. The US government’s bond rating may no longer be AAA, but if it can’t pay us off on debt like this, I think we have bigger, more widespread problems as investors.
Total Return Potential from Lower Rates
Let’s explore that last one. These two ETFs don’t vary much in price. Check out their beta versions in the table above. But its price will appreciate if rates fall.
That, coupled with its current returns of around 3.2%-3.4%, seems uninspiring after a year like we’ve had with stocks. But if we add price gains and that initial yield, on a stock decline and perhaps a rise at the long end of the yield curve, SHY and IEI could fill a gap. The gap between the ultra-safe but non-price appreciation of T-bills and the wild west of everything else in a market disruption.
In other words, a graph like this will suddenly seem very desirable. IEI has a bit more price action, which also means that if rates drop to its 3-7 year maturity range, it can add a few percentage points to that 3%-4% yield within a year.
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Looking at ETFs this way is something of a combination of risk management and cash management. This is not likely to be the time in the market cycle when “everyone” is clamoring for ideas like this.
But if history rhymes, there will come a time when you’ll be glad you bookmarked this article.
Rob Isbitts, founder of Sungarden Investment Publishing, is a semi-retired investment director, whose current research is found here at Barchart and its ETF Yourself subscription service. in substack. To copy and market Rob’s portfolios, check out the New Pi Trade app.
On the date of publication, Rob Isbitts had no (directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are for informational purposes only. This article was originally published on Barchart.com
