Best Places To Stash Your Cash

by: Alpha Gen Capital

Interest on cash is back.

Our aim is to generate safe, and in some cases, uncorrelated income for our safe bucket allocation.

This bucket's size varies based on individual investor circumstances.

Liquidity plays an important part of the analysis.

Now that rates have backed off their historic lows, cash is starting to actually pay interest again. With the Fed rate at 2.50%, and the average savings account paying around 2% interest, we can finally start to earn some income on our stashed cash.

Aside from the typical accounts to stash your cash, there are cash substitutes out there where you can increase your yield between 75 and 150 bps over that average savings account without increasing your risk exposure much.

Below we detail a few of our favorite places to stash cash while we wait for opportunities to arise.

Cash Substitutes:

  1. PIMCO Active Enhanced Bond (MINT): Our preferred cash substitute. That does not mean it is pure cash or as safe as cash but it exhibits "cash like" characteristics in terms of volatility and credit risks.
    • Forward yield: 2.72%
  2. Lord Abbett Short Duration Income (LUBAX) (LUBYX): A moderate fee, very short duration bond fund that is very safe.
    • Forward yield: 2.73%

  3. iShares Short Maturity Bond (NEAR): Another highly liquid actively managed (key point) bond ETF with low duration and high quality.

    • Forward yield: 2.84%
  4. Invesco Short Term Bond ETF (GSY): Another liquid, actively managed bond fund with mostly high quality stuff.
    • Forward yield: 2.53%
  5. SPDR Bloomberg Barclays 1-3 Month T-Bill (BIL): A liquid treasury ETF that invests in the short end of the yield curve.
    • Forward yield: 2.23%

I'm really agnostic about the first four above. I do tend to favor MINT simply because of the PIMCO brand name. NEAR actually has slightly better liquidity, but MINT has more than enough shares traded each day.

UltraShort Bonds:

These have slightly more risk than a traditional money market fund but we still classify them as a 1-rating. The addition of a few of these options along with PONAX (5.25% yield) can increase the overall yield of your Safe Bucket to over 3%.

PGIM Absolute Return Bond (MUTF:PADAX): A higher quality multisector fund that does contain some (<30%) in high-yield securities.

  • Forward yield: 3.44%

Semper MBS Total Return (SEMMX/SEMPX): An MBS-focused fund with a concentration in non-agency rMBS. We've highlighted this one several times for its strong risk-adjusted returns.

  • Forward yield: 4.44%

Metropolitan West Unconstrained Bond (MUTF:MWCRX): This one costs a fee at Fidelity, but it's a decent fund. The fund has about 20% in HY securities with a mix across sub-sectors to the bond market.

  • Forward yield: 4.25%

MainStay MacKay Unconstrained Bond (MASAX): Another low duration blended fund. About half of the fund is corporate bonds with the rest in government-related securities. About 27% of the fund is in HY securities with most being in the BB (highest) rated segment.

  • Forward yield: 3.30%

TCW Strategic Income (TSI): This is the only closed-end fund that we would include in cash substitutes (safe bucket). This is a low-risk, largely corporate bond fund run by a premier manager. The PMs of the fund toggle back the risk as the economy progresses through the cycle. TSI yields 5.3% and trades at a 4.8% discount to NAV. Anytime this fund gets to a -6% discount, we tend to add a few shares if we have excess cash. Just beware of liquidity as it could take several days to get out of large positions and if you're trying to take advantage of opportunistic selloffs elsewhere in the market, you may miss the boat.

Some Considerations:

We have been primarily focused on short-duration funds for the last 3-4 years given the low rate environment. As we approach the end of the cycle, it may be necessary to add some duration to the bucket in order to capitalize on rates falling as we move into a slower (or even negative) growth environment.

For larger balances where liquidity is not a factor, you could use a TreasuryDirect account and purchase directly from the U.S. treasury - treasury bills and notes.

We get asked a lot about certificates of deposits (CDs). 1-year CDs, according to bankrate, now average around 2.70%. Going out any farther than a year does not make sense given the flatness of the curve. For example, a 2-year CD pays 2.80%, only 10 bps more to have your money locked up another year.

For those looking to build a ladder portfolio, we still like BulletShares from Invesco (Invesco website here). The iBonds from Blackrock are also good. Just be mindful of liquidity.

Below is the table from Invesco on their BulletShares. The starting yield-to-worst for the current year fund is approximately 2.64%. Taxes should be considered here as nearly all of the distribution is considered ordinary income. For non-qualified account, think about using the iBonds Municipal Target ETFs.

Here are some of the places for cash we currently recommend:

Ticker Name Category Current Price Yield Risk Annualized Volatility
TIP iShares TIPS Bond TIPs 111.64 2.65% 1 6.30%
MBB iShares MBS Bond Mortgage 105.36 2.67% 1 3.50%
GSY Invesco Ultra Short Duration Bond 50.30 2.53% 1 0.50%
IEI iShares 3-7 Year Treasury Treasury 121.91 2.00% 1 4.10%
GLD SPDR Gold Shares Gold 122.42 0.00% 2
SHY iShares 1-3 Year Treasury Treasury 83.74 1.80% 1 1.40%
MINT PIMCO Enhanced S-T Strategy Bond 101.40 2.41% 1 0.60%
SHM SPDR S-T Municipal Bond Muni 48.37 1.25% 1 4.00%
PMZIX PIMCO Mortgage Opps Mortgage 10.83 3.58% 1 2.50%
PTIAX Performance Trust Strategic Bd Bond 22.31 5.13% 1 2.10%
LDUR PIMCO Low Duration Active Bond 99.44 3.05% 1 4.00%
SEMPX SEMPER MBS Total Mortgage 10.45 4.19% 1 1.70%
PIGIX PIMCO Investment Grade Corp Bond 10.21 3.78% 2 3.80%
PONAX PIMCO Income Bond 11.97 3.33% 2 3.20%

(Risk rating a qualitative and quantitative scoring from 1 to 5. 1 being safest.)

PTIAX, SEMPX/SEMMX, PONAX, and PIGIX should be classified as short-term bond funds with the commensurate risks that come from that space. We get many questions on why wouldn't I just put most of my safe bucket into a fund like SEMMX which yields much higher than GSY or MINT? That is because the risk profile is highly different though they can both be rated "1." SEMMX isn't diversified as it is completely invested into the non-agency MBS space.

PIGIX, could be substituted with the iShares iBoxx Corporate Bond (LQD) for more liquidity. These two funds have nearly half of their allocation in BBB-rated debt which is the lowest on the quality spectrum.

Liquidity is also important. LDUR, while similar to MINT but with slightly more duration and more yield, has much less liquidity.

Concluding Thoughts

Spreading your bets around is key along with focusing on credit quality and liquidity. Having all of your safe money in CDs or money-markets makes little sense to me given the lack of flexibility. But aligning your 'need' with short-term liquid assets while keeping your tactical money - the capital sitting on the sidelines in highly liquid and safe stuff (like MINT).

I think you could easily target a 3%-3.25% overall safe bucket yield and not be reaching very far out on the risk spectrum.

Disclosure: I am/we are long MINT, GSY, SEMMX, LUBYX. 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.