Diya Gullapalli in the Wall Street Journal examines the enhanced-cash funds that arose while short term rates were particularly low. However, with the rise in short term rates, their efficacy is now being called into question.
Enhanced-cash mutual funds aim to deliver a higher yield than money-market mutual funds, one of the most popular and safe places for individuals to park their cash. They typically do this by including in their portfolios securities that have slightly longer maturities or that have lower credit ratings, such as mortgage-backed securities and corporate bonds. By contrast, money-market mutual funds hold short-term Treasury securities and commercial paper, or shorter-term corporate IOUs…
Investors can thank the Federal Reserve for enhanced-cash funds’ reduced appeal. The Fed has been pushing up short-term interest rates to head off inflation, even as long-term market rates have remained little changed. Because of that, investors might not benefit much from the longer-term, riskier investments currently offered in enhanced-cash funds. While money-market funds invest mostly in three-to-six-month maturities, enhanced funds focus on maturities of about one year.
Gullpalli notes that one beneficiary of this trend has been the Barclays Global Investors’ iShares Lehman 1-3 Year Treasury Bond Fund (NYSEARCA:SHY) which has seen its assets double in the past year.