I probably don't need to tell you that cash in today's financial markets earns pretty much nothing. Whether it's bank money markets, savings accounts or money market mutual funds, yields in most cases are at or very near 0%. With the Fed aiming to keep rates as low as possible indefinitely, there's not a clear timeline for when this situation might change.
The only real solution at this point is to push further out on the risk spectrum to get a yield boost, but even creates some problems. A broad investment-grade corporate bond ETF, such as the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), only yields 2.3%. High yield bond spreads are near record lows.
It's an unfortunate reality that you're going to have to add risk right now for even the slightest increase in yield.
If you're sitting on cash, you can do this, fortunately, without taking an excessive amount of added risk. Dumping your cash position into a 2.3% yielding portfolio of intermediate-term BBB-rated corporate bonds isn't a good solution, but you can push out from a money market fund to an ultra-short term bond ETF without tipping the scales too much.
The Vanguard Prime Money Market Fund yields a scant 0.01%, so it won't take much to clear that low bar. Getting up to a 1% yield would still require something riskier than should probably be considered for a cash alternative position, so I suggest investors take a single step up the risk ladder and consider an ultra-short term bond fund. With these, you'll typically earn something in the 0.3% to 0.4% range, not a huge difference, but something worth considering if you keep a larger balance in cash.
Of course, with these funds comes interest rate risk and the possibility that you're balance could fall if interest rates start heading north again. By looking at a fund's duration, you can see just how interest rate sensitive a fund is. For example, a bond ETF with a duration of 3 could reasonably be expected to fall about 3% in value for every 1% rise in interest rates and vice versa. Sticking with a smaller number helps to ensure that your risk exposure is minimized while trying to get that higher yield.
Here are six ETFs worth considering as quasi-cash alternatives. I'll discuss each in a little more detail down below.
JPMorgan Ultra Short Income ETF (JPST)
JPST is one of my favorite options in this space because of its simplicity and exposure at an inexpensive price. The fund sticks with investment grade bonds and aims for an overall portfolio duration of less than one year. Within those parameters, there is some flexibility to invest in corporates, Treasuries, asset-backed securities, commercial paper and other securities. Currently, the fund has about 60% of assets in corporate bonds with almost no exposure to Treasuries.
The other feature JPST has is that it considers ESG characteristics for security selection and investment analysis. Investors are getting a solid portfolio, while at the same time eliminating some of the potentially more unsavory names and sectors.
Vanguard Ultra Short Bond ETF (VUSB)
I don't typically recommend ETFs that are only a couple weeks old, but VUSB is an exception since it's got the Vanguard powerhouse behind it. Its exposure strategy is similar to that of JPST, although it gives itself a little more freedom to dip into medium quality fixed income if the management team finds opportunities. It aims to maintain a portfolio duration of between 0 and 2 years, but will be reasonably expected to stay under one year.
If you're trying to squeeze every basis point possible out of your investment, VUSB, in very Vanguard-ian fashion, is among the cheapest funds in this space charging just 0.10% annually.
iShares Floating Rate Bond ETF (FLOT)
FLOT is unique in that it targets floating rate investment-grade corporate bonds, not the typical fixed rate notes you see in many other bond ETFs. With these bonds, the interest rates on them reset periodically and generally stay in line with what the current market bears. Because of this, interest rate risk is much lower than that of fixed rate notes and brings the portfolio duration down pretty close to zero.
A near-zero duration, however, doesn't mean risk-free. There's still credit quality risk to consider. FLOT, again, sticks with only investment-grade bonds and has just 20% of assets in BBB-rated bonds, the lowest rating that is still considered investment-grade. That's a lower than you find in many corporate bond ETFs today and actually makes it slightly favorable to its peers. However, because of the lower risk nature of floating rate notes, the yield is also slightly lower.
iShares iBonds Dec 2021 Term Corporate Bond ETF (IBDM)
This is another way of going about targeting ultra-short term notes - investing based on the stated maturity date. At a high level, there's not a whole lot different between investing in a fund like VUSB and this one. The big difference is that IBDM has a hard end date. When the target maturity date passes, in this case, December 2021, the fund is forced to liquidate and you'd need to move your money into the next target date bond ETF down the line.
IBDM's portfolio is just slightly lower quality overall, but not enough to make it significantly riskier. A fund, such as VUSB or JPST, may be preferable since it automatically reinvests in case any of the fund's underlying notes matures, but this is another good low cost option.
Fidelity Low Duration Bond Factor ETF (FLDR)
FLDR is unique in that it's primary objective isn't just to provide broad exposure to ultra-short term investment grade bonds. As Fidelity's website notes, the fund's index "is designed to optimize the balance of interest rate risk and credit risk such that both returns and risk measures may be improved relative to traditional U.S. investment grade floating rate note indices." In other words, it makes an attempt to improve risk-adjusted returns.
FLDR also has the highest duration of this group, so, in theory, would have the highest interest rate risk. It also has about 10% of assets in Treasuries, which is unique among this group of ETF peers.
PIMCO Enhanced Short Maturity Active ETF (MINT)
MINT is one of the largest bond ETFs out there with assets of more than $14 billion. Because it's actively-managed, it has the ability to purse high reward opportunities than can give it an edge over similar ETFs.
MINT, unfortunately, demonstrated last year the risks that can come even with investment-grade low duration funds. During the worst of the COVID bear market, MINT's share price disconnected from its underlying portfolio value as investors ran away from anything that contained risk. Because of that, MINT's share price fell nearly 5% over the course of two weeks. Within three months, the fund was able to claw back everything it had lost, but it was a case study in how even high quality portfolios can be susceptible to down side in the worst situations.