I know, I know. Short-term bonds? Like good investments? Blasphemy, right? But listen to me. I think there’s more than a chance that among all those fancy covered call ETFs, closed-end funds with double-digit returns, and dividend stocks “expected” to rebound in 2026, the year might belong to some of the most boring ETFs on planet Earth.
I will name names below. First, let me explain why ETFs holding U.S. Treasury securities with maturities between 1 and 7 years might surprise some people in 2026.
The economy heading into the new year is a real headache. At least if you listen to all the financial chatter I make on a daily basis. What worries me is that the same people who brag about the success of the economy Also do you want lower interest rates? What are we doing here?
I’m a technician and I don’t subscribe to general political or even economic approaches to assessing markets. I look at photos all day. Images of stock and ETF price trends, as well as “leading” market indices. And what I see is high risk for the stock market. And pressure from financial sources large enough to drive down short-term interest rates.
In summary, there are two different reasons why US short-term rates could fall in 2026, perhaps significantly.
Those who say “we need lower rates” want it and have the potential to get it. It’s a mix of government officials who have a large number of Treasuries maturing in the next 12 months that need to be refinanced, and investors who want infinite QE (cheap money forever, the better to speculate). And with the upcoming arrival of a new Fed president, there is the desire to do so.
If the economy slips into recession (a word that isn’t said enough these days in my opinion, given the ongoing K-shaped economy), that alone will provide an easy path to lower rates. Stimulate the economy because it really needs it, not because the people on Wall Street need to borrow more to get more leverage.
So that’s my case in brief. And while stocks and long-term bonds are potential winners in this scenario, they both carry more risk than ETFs like this pair and others like them.
The two I focus on are the 1-3 year Treasury iShares (SHY) and the 3-7 year Treasury iShares (IEI). They’re both in my unofficial “ETF Hall of Fame” for how they’ve saved me during past market cycles.
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I’m a big fan of inverse ETFs, which help us profit directly from falling stock prices. But this pair, when conditions are right, as they might be in 2026, have all of this in their favor:
Long-lived (SHY debuted in 2002, IEI in 2007). They have weathered difficult stock and bond markets.
Low cost (minimal expense ratio, so it doesn’t get in the way)
Less volatile by nature given the shorter maturities. I compared them in the table above to a standard bond benchmark.
High quality. The US government’s bond rating may no longer be AAA, but if they can’t pay us debt like this, I think we’ll face bigger and more widespread problems as investors.
Total return potential thanks to lower rates
Let’s explore the latter. The price of these two ETFs does not vary much. Check out their beta versions in this table above. But their price will increase if rates fall.
That, coupled with their current yields of around 3.2% to 3.4%, doesn’t seem inspiring after a year like we’ve had for stocks. But by combining price gains and that starting yield, a decline in stocks, and perhaps an increase in the long end of the yield curve, SHY and IEI could fill a gap. The gap between ultra-safety but no price appreciation in Treasuries, and the Wild West of everything else in a market disruption.
In other words, a chart like this will suddenly seem very desirable. The IEI has a little more price action, which also means that if rates drop to their 3-7 year maturity range, it can add a few percentage points to that 3-4% one-year yield.
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Looking at ETFs like this is like a combination of risk management and cash management. This is probably not the time in the market cycle where “everyone” will be clamoring for ideas like this.
But if the story 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 executive, whose current research can be found here at Barchart and on its ETF Yourself subscription service. on the sub-stack. To copy-trade Rob’s wallets, visit new Pi Trade app.
As of the date of publication, Rob Isbitts had (directly or indirectly) no position in any of the securities mentioned in this article. All information and data contained in this article are for informational purposes only. This article was originally published on Barchart.com
