Here Are Your Best Choices For Holding Cash

by: Left Banker


It seems a lot of investors are keeping a larger than normal allocation to cash.

I review choices for holding cash with liquidity.

Money market? Short-term treasuries? Other choices?

Best Choices For Cash

Are you holding a larger than normal allocation of cash these days? Seems like a lot of folks on Seeking Alpha are doing that if the site's contributors and commenters are representative. Have you given much thought to what you’re doing with that cash? Many of us roll it into their broker’s money market fund and don’t give it a lot of thought. Which is convenient and just fine if you’re using it as a brief holding between investments. But what if you’re expecting to be in a large cash position over a longer time frame? Some hold it in CDs, but that ties up the cash, potentially for longer than may be preferable.

A standard recommendation from many asset allocation strategists is to hold that money in short-term treasuries. The iShares 1-3 Year Treasury Bond ETF (SHY) is routinely recommended.

I have my accounts with Fidelity where the default is the Fidelity Government Money Market (SPAXX). Under most circumstances, we can expect SHY to outpace the money market account by a bit, right? But it's been a while since that expectation has been accurate. In fact, over the last year, SHY has been losing money.

SHY’s yield is 1.16%; the money market fund pays 1.49%. And, SHY has been losing value at a rate greater than its yield. This year that has made a difference to the tune of 99bps.

And that’s after SPAXX’s absurd 0.42% expense rate while SHY only assesses its shareholders 0.15%. When we’re considering yields well under 2%, that becomes a huge difference.

Of course, this isn’t typical and hasn’t always been the case, but there are still better choices than SHY even when it's beating the money market funds. They will take a bit of effort compared to the money market fund but are no more difficult than SHY.

Four ETFs

Here’s a list of short duration, floating-rate ETFs to consider as alternates to either SHY or the broker’s money market fund:

PIMCO Enhanced Short Maturity Active ETF (MINT)

iShares Floating Rate Bond ETF (FLOT)

SPDR Barclays Capital Investment Grade Floating Rate ETF (FLRN)

Vanguard Short-Term Bond ETF (BSV)

Let’s start with expenses.

No one will be surprised to see that the Vanguard fund leads the category on expenses. MINT, the most intensely managed, does beat the Fidelity money market fund, but that’s all it beats.

Current yields are:

So the four ETFs are returning more to shareholders than either the money market or SHY.

Each of these is managed with differing degrees of intensity. MINT is certainly the most intensely managed, which may or may not justify its high expenses. FLOT and FLRN track the same index with FLOT giving management the leeway to use futures, options and swap contracts for 10% of the portfolio. BSV is the sort of passive index fund one would expect from Vanguard.

MINT invests at least 80% of its net assets in a diversified portfolio of fixed-income instruments of varying maturities, which may be represented by forwards. These include bonds, debt securities and other similar instruments issued by various U.S. and non-U.S. public or private sector entities. The average portfolio duration of this fund will vary based on PIMCO's market forecasts and will normally not exceed one year. Morningstar puts its current average effective duration at 0.48.

FLOT generally will invest at least 90% of its assets in the component securities of Bloomberg Barclays US Floating Rate Note < 5 Years Index and may invest up to 10% of its assets in certain futures - options and swap contracts - cash and cash equivalents - as well as in securities not included in the underlying index - but which BFA believes will help the fund track the underlying index. FLOT's average effective duration is a scanty 0.13.

FLRN generally invests substantially all - but at least 80% - of its total assets in the securities comprising or are deemed substantially identical to those comprising the Bloomberg Barclays U.S. Dollar Floating Rate Note < 5 Years Index. The index is designed to measure the performance of U.S. dollar-denominated investment grade floating rate notes. FLRN, which tracks the same index as FLOT has essentially the same average effective duration: 0.12.

BSV seeks to track the performance of Bloomberg Barclays U.S. 1-5 Year Government/Credit Float, which includes all medium and larger issues of U.S. government - investment-grade corporate - and investment-grade international dollar-denominated bonds that have maturities between 1 and 5 years and are publicly issued. All of its investments will be selected through the sampling process - and at least 80% of its assets will be invested in bonds held in the index. BSV's average effective duration is 2.71.

SHY tracks 1-3 year treasuries and has an average effective duration of 1.94.


If we look at yearly returns for each of the ETFs going back to the inception date of the youngest (FLRN, Jan 2012), we see that they beat SHY with few exceptions.

"But," you may say, "I’m not looking to squeeze a few extra basis points of yield from my cash allocation, I’m looking for stable value." To which I will answer: "Let’s look at the volatility of these funds. It may surprise you."

Here’s the standard deviations for the past 6, 12 and 24 months.

All but BSV are less volatile than SHY with MINT’s standard deviation coming in half or less than the other funds.

We can sum this up in one chart.

We see three distinct cohorts: The completely stable money market fund. The volatile and under-performing SHY and BSV. And the more actively managed, low-volatility, floating-rate funds MINT, FLOT and FLRN. Any of this last group is preferable to the first two cohorts as a place to hold cash.

Each of these is highly liquid. Spreads are a penny, and market orders tend to fill between the bid and ask penny. Not as simple as just letting the money sit in that money market account, perhaps, but for large cash allocations that one expects to maintain as cash for a more-or-less extended period, you are giving up real money by sticking with either the money market or SHY.

Fidelity charges no commission on FLOT, so I’ve settled on that fund for my purposes. Other brokers may have similar no-fee alternatives, but I've not checked. In the past, I’ve used MINT and may do so again in the future. I like the fact that it’s the least volatile of the set, after all the whole point of keeping cash is to not lose money, right?

Disclosure: I am/we are long FLOT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am not an investment professional and nothing I write here should be taken as professional advice. Everyone's personal situation is unique. It is the role of finance professionals to provide advice in the contexts of an individual's personal situation. What may be right for my investment goals and risk tolerances may well be quite wrong for someone else. Do your own due diligence. Consult with professionals on your own needs, objectives and tax circumstances before you invest. I do not give advice and ask that readers refrain from asking for it.