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
