Ultra-short bond funds typically invest in a diversified portfolio of short-term fixed-income securities. Their main objective is to generate income while maintaining relatively low interest-rate sensitivity compared with funds holding longer-term bonds. The exact securities vary by fund, but several types are commonly included.

Government and Treasury securities are often used because they generally have high credit quality and relatively predictable interest payments. Funds may also hold agency securities issued or guaranteed by government-related institutions. These investments can provide stability while contributing to portfolio income.

Corporate bonds are another common holding. Ultra-short bond funds may invest in investment-grade corporate debt issued by companies with strong credit profiles. These securities can offer higher yields than comparable government debt, although they introduce additional credit risk.

Commercial paper may also be included. This is short-term debt issued by corporations, usually to finance operating expenses and other near-term needs. Some funds may hold certificates of deposit or other bank-issued short-term instruments as well.

Certain ultra-short bond funds can invest in asset-backed securities, which are supported by pools of assets such as auto loans, credit-card receivables, or other forms of consumer debt. Depending on the fund's strategy, holdings may also include repurchase agreements and other highly liquid short-term instruments.

The securities selected are generally characterized by short maturities or limited duration. This structure helps reduce sensitivity to changes in interest rates, although it does not eliminate market or credit risk. Investors should review a fund's prospectus and portfolio holdings to understand exactly what it owns, its average maturity, credit quality, duration, and risk level before investing.