What is XONE? (Pros, Cons, and Strategies)

If you're seeking a short-duration bond investment with low interest rate risk, XONE might be what you need. Many investors use XONE to gain exposure to U.S. Treasury securities while managing interest rate sensitivity, making it a compelling option for both retirement portfolios and more short-term fixed income allocations. In this post, we will delve into what XONE is, its advantages and disadvantages, and some effective strategies for investing in it.

What is XONE?

XONE stands for the BondBloxx Bloomberg One Year Target Duration US Treasury ETF. It's an exchange-traded fund (ETF) that aims to track the performance of the Bloomberg US Treasury One Year Duration Index.

This ETF is designed to invest in U.S. Treasury securities that have a one-year duration target, providing a relatively safer investment option for those concerned about interest rate increases affecting longer-duration bonds.

Key Features of XONE

• Focus on Short-Duration U.S. Treasuries: XONE primarily invests in U.S. Treasury securities with a duration target of one year.
• Low Credit Risk: Given that it invests in U.S. Treasuries, the credit risk is extremely low.
• Interest Rate Sensitivity: The short-duration focus helps reduce interest rate sensitivity compared to longer-duration bond funds.

XONE Composition

XONE predominantly consists of short-term U.S. Treasury securities. These government-backed securities come with the full faith and credit of the U.S. government, ensuring minimal default risk. The fund seeks to maintain a one-year duration profile by continuously rolling over its holdings to align with its target duration.

Pros of XONE

Low Interest Rate Risk

The primary advantage of investing in XONE is its low sensitivity to interest rate changes. Since the fund focuses on short-duration U.S. Treasury securities, it's less exposed to the risks associated with rising interest rates, which can significantly impact longer-duration bonds.

High Credit Quality

XONE invests in U.S. Treasury securities, known for their high credit quality and minimal default risk. This makes it a safe haven for investors looking for stability and liquidity.

Predetermined Duration

By targeting a specific duration of one year, XONE offers predictability and a structured approach to managing interest rate risk. Investors can match their investment horizon more precisely, making it easier to plan for short-term financial goals.

Expense Ratio

XONE generally has a lower expense ratio compared to various active bond funds. This can be a crucial factor, especially for long-term investors looking to keep costs low while maintaining high-quality exposure to U.S. Treasuries.

Cons of XONE

Lower Yield

While XONE offers safety and low interest rate risk, it comes at the expense of lower yields compared to longer-duration or high-yield bonds. Investors seeking higher income might find XONE less appealing as its yield is typically modest.

Limited Capital Growth

XONE is primarily designed for preservation of capital and interest income, not for significant capital appreciation. Investors looking for higher growth potential may need to consider other types of investments, such as equity ETFs or longer-duration bonds.

Inflation Risk

Given that the returns on short-term Treasuries are relatively low, they might not keep up with inflation, diminishing the real purchasing power of the returns over time.

XONE Investment Strategies

XONE can be a valuable part of an investment portfolio, offering stability and low interest rate risk. Here are some strategies to maximize its benefits:

Short-term Liquidity Strategy

For investors with short-term cash needs, XONE provides a liquid, low-risk option. It can serve as a temporary holding for funds that need to be accessed within a year, offering better returns than a traditional savings account while maintaining low risk.

Risk Management Strategy

Using XONE as a part of a broader diversified portfolio can help balance risk. For instance, if an investor has a portfolio heavy in equities or high-yield bonds, incorporating XONE can add an element of safety and reduce overall portfolio volatility.

Laddering Bond Strategy

Investors can incorporate XONE in a bond laddering strategy. By staggering the maturities of different bond holdings, including short-duration bonds like XONE, investors can manage interest rate risk and reinvest at regular intervals, potentially benefiting from rising interest rates over time.

Retirement Income Strategy

While XONE may not offer the high yield of other income-focused investments, it can still play a role in a retirement portfolio by providing stable, predictable income with low risk. This can be particularly appealing for retirees seeking to protect their principal while meeting short-term income needs.

Overall, XONE is a specialized ETF that offers a targeted solution for managing short-term interest rate risk and maintaining high liquidity and credit quality. While it may not be suitable for every investor, it can serve as a vital component of a well-balanced, risk-conscious investment portfolio.