2025-09-22
Exchange-traded funds (ETFs) have transformed the way individuals and institutions invest. They provide broad access to stocks, bonds, and commodities in a single, low-cost package. But not every ETF is equally famous. While the world knows about S&P 500 trackers or equity growth funds, other ETFs play a quieter, but no less important, role.
One of those understated players is the iShares 1-3 Year Treasury Bond ETF (ticker: SHY), widely known as the SHY ETF. It tracks short-term U.S. government bonds and is one of the most heavily used funds for managing risk and liquidity. Yet, despite its scale and importance, the SHY ETF is often misunderstood. Many investors assume it is identical to cash, that it never loses money, or that it has no place in modern portfolios.
These myths are costly. Misusing the SHY ETF or dismissing it entirely can leave gaps in a portfolio. In this article, we will explore the history of the SHY ETF, break down the ten biggest myths surrounding it, and explain what investors really need to know. By the end, you will have the clarity to evaluate whether this ETF deserves a spot in your strategy.
The SHY ETF has existed for over two decades, but its performance in recent years tells a particularly instructive story. It reflects how sensitive even short-term bond funds can be to changing interest rates, inflation, and Federal Reserve policy.
In 2021, markets were still digesting the effects of the pandemic. Interest rates were near zero, inflation was building, but central banks had yet to tighten policy. SHY ETF delivered modest returns of around 0.3% that year. Investors often treated it as a safe place to park cash while waiting for opportunities elsewhere. Its yield was low, but so were those on savings accounts and money market funds.
Everything changed in 2022. Inflation surged to levels not seen in decades, prompting the Federal Reserve to hike rates aggressively. Long-term bond funds collapsed, some losing over 20%. The SHY ETF also declined, with a total return near -3.9%. This loss was modest compared to long-duration bonds but still a shock for investors who believed short-term Treasuries never go down. It highlighted the truth: the SHY ETF reduces risk but cannot eliminate it.
As inflation eased and markets adjusted to higher interest rates, SHY ETF bounced back in 2023, delivering returns of about 4.2%. Investors regained confidence in bonds as yields stabilised, and the SHY ETF’s short maturity allowed it to reset quickly. By reinvesting maturing securities at higher yields, the fund adjusted to the new environment faster than long-duration peers.
By 2024, the SHY ETF returned around 3.9%, reflecting the elevated interest rate environment. With average maturity of about 1.9 years, it provided investors with steady income while keeping volatility relatively low. For many, the SHY ETF became a preferred tool for combining safety with yield, especially when compared to bank deposits that often lag behind Treasury rates.
This four-year window shows the dual character of the SHY ETF. It is both a safe haven and a reminder that even government bond funds are influenced by the broader economic cycle.
The SHY ETF fills several distinct roles in portfolios:
Capital preservation: Investors use it to protect principal during turbulent equity markets.
Yield enhancement: With short-term Treasury yields elevated, the SHY ETF often outperforms traditional savings products.
Portfolio stabiliser: It reduces volatility when combined with riskier assets.
Cash alternative: Institutions in particular use it to manage liquidity efficiently.
Tactical tool: Traders shift into SHY ETF temporarily when expecting near-term volatility elsewhere.
Its flexibility explains why myths form so easily—people see different things in the SHY ETF depending on how they use it.
At first glance, the SHY ETF looks like cash: safe, stable, and liquid. But it is not. Cash does not fluctuate in price, whereas SHY ETF does. In 2022, SHY fell nearly 4%. For an investor expecting a cash-like experience, that decline was surprising. The takeaway: SHY ETF is safer than most investments, but it still carries interest rate risk.
It is easy to assume that SHY ETF produces trivial yields. Yet in the past two years, it has yielded close to 3.5%–3.9%. That is far from negligible, especially when compared to traditional bank accounts. Over time, these returns compound meaningfully. Investors dismissing SHY ETF as unproductive risk underestimating its role as a steady income generator.
Treasuries are safe in credit terms, but that does not make them immune to price changes. The SHY ETF can and has lost money, as seen in 2022. The losses are smaller than long-term bonds but still real. Investors need to treat SHY ETF as low-risk, not no-risk.
Despite its “quiet” label, SHY ETF is among the most liquid bond ETFs globally. It trades millions of shares daily, allowing institutions and retail investors to enter and exit with ease. Bid-ask spreads are generally narrow, reflecting its popularity in fixed-income strategies.
At 0.15%, SHY ETF’s expense ratio is low by industry standards. Some assume any fee is excessive for government bonds, but the ETF provides convenience, scale, and instant diversification across dozens of Treasuries. For investors without the ability to buy bonds directly, this cost is modest.
It is true that many risk-averse investors hold SHY ETF, but its use extends beyond them. Hedge funds use it to park liquidity between trades. Active traders rotate into it when they want a temporary safe haven. Institutions rely on it for liquidity management. Its utility is broader than “conservative” only.
Inflation protection is not SHY ETF’s mandate. Its yield may help offset inflation, but when inflation surges faster than yields rise, real returns fall. For genuine inflation protection, investors would need Treasury Inflation-Protected Securities (TIPS), not SHY ETF.
Diversification is not just about asset count but about behaviour. The SHY ETF tends to move differently from equities and riskier bonds, especially during downturns. While it will not generate spectacular returns, it smooths the ride. That smoothing effect is valuable diversification.
Some investors keep SHY ETF for years, but others use it tactically. It can be a holding place for cash before redeployment, or a hedge during short bursts of equity volatility. Its short duration allows flexibility in both short- and long-term contexts.
With so much focus on equities and alternative assets, some claim SHY ETF is outdated. Yet the recent interest rate cycle has restored its relevance. Investors seeking yield with safety have returned to SHY ETF, proving it is still essential.
For retirees: The SHY ETF provides steady income with low risk, making it attractive for capital preservation.
For active traders: It is a tactical refuge during volatile periods, allowing quick re-entry into risk assets.
For institutions: The SHY ETF functions as a liquidity vehicle, helping manage cash efficiently.
For balanced investors: Adding SHY ETF reduces overall volatility, smoothing returns across cycles.
Its adaptability across investor types is a key reason why the SHY ETF has remained popular despite being labelled “boring”.
Yes. While it invests in U.S. Treasuries, its price still moves with interest rates. In 2022, for example, it fell nearly 4%. These are smaller losses than longer-duration bonds but important to acknowledge.
It depends. SHY ETF is more stable than equities but not as certain as cash. Investors willing to accept mild fluctuations in exchange for higher yield may prefer it to cash-like options, but it should not be mistaken for risk-free savings.
The SHY ETF benefits conservative investors seeking safety, institutions needing liquidity, and traders looking for a short-term refuge. It is flexible enough to suit different purposes, but the best use comes when its limitations are clearly understood.
The iShares 1-3 Year Treasury Bond ETF, or SHY ETF, may not make headlines, but its role in portfolios is undeniable. Myths about it being risk-free, irrelevant, or identical to cash do investors a disservice.
In reality, the SHY ETF is a practical tool for safety, income, and flexibility. It can preserve capital in turbulent times, provide steady monthly distributions, and smooth out portfolio volatility. It is not designed to dazzle but to stabilise—and that makes it invaluable.
As the financial environment evolves, the SHY ETF will continue to matter. Investors who see past the myths and use it wisely will find it is not shy at all, but rather a dependable partner in long-term wealth management.
Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
