SHV: Short-Term Treasuries Are Back In Style For Retirement

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About: iShares Short Treasury Bond ETF (SHV)
by: Josh Ortner
Summary

Short-term treasuries are offering investors a 2.3% yield with six-month and under durations.

The flattening and inverting yield curve is providing nervous investors yield to hide out of equities.

The iShares Short Treasury Bond ETF is an alternative to traditional savings accounts with financial institutions.

When thinking of an investment idea, most investors don't consider treasuries as an attractive alternative. Yet, treasury funds such as the iShares Short Treasury Bond ETF (SHV) have provided steady returns this year. As investors are becoming more nervous about the global economy and trade war, more and more savers are snatching up U.S. treasuries for the safe haven status. This could be a great entry point for investors to consider SHV, as risks to the global expansion are rising. The four major bullet points that I believe iShares wants you to take away about SHV are as follows:

  1. Allows exposure to U.S. treasury bonds that mature in less than 1 year.
  2. U.S. treasury bills are one of the most conservative bond purchases you can make.
  3. Interest and dividends are paid monthly to shareholders.
  4. The expense ratio of the ETF is .15%.

Monthly Performance

Any time I make a new investment on behalf of myself or clients, I always pull up the monthly returns.

Year Month Return
2018 1 0.13%
2018 2 0.01%
2018 3 0.17%
2018 4 0.09%
2018 5 0.16%
2018 6 0.15%
2018 7 0.13%
2018 8 0.18%
2018 9 0.14%
2018 10 0.17%
2018 11 0.19%
2018 12 0.20%
2019 1 0.24%
2019 2 0.16%
2019 3 0.22%
2019 4 0.19%
2019 5 0.24%

(Source: PortfolioVisualizer.com)

If you are retired, you probably want a monthly dividend check. At minimum, you probably look monthly at your brokerage statement to see what is going on. With SHV, you don't have to worry about what is going on. Just steady treasury bill income paid monthly to shareholders of record.

30-Day SEC Yield Of 2.33%

The iShares Short Treasury Bond ETF is effectively yielding around 2.33% to investors, paid monthly. For those of us who are earning nothing on our cash in our checking or savings accounts, this would be an awesome alternative. You would be amazed at how little savers don't know about what they are earning. Just this week, I helped an investor earn more interest income with SHV, instead of using a traditional financial savings instrument. One of the biggest reasons he liked SHV was that U.S. treasury bills are essentially the risk free asset of the world. When you park money at a banking institution, you are essentially betting that the bank will stay afloat and will be able to meet its obligations. Most of all the times, banks do meet their obligations, but for those of us who don't want to even take that one chance, U.S. treasury bills are the way to go.

Under The Hood

When doing your homework on any fund, you have to take a look at what it actually owns. The SHV holds approximately 70% U.S. treasuries today, and 30% cash. I was actually shocked to see that it holds this much cash, and yet still yields roughly 2.3% in interest on all of its holdings.

ISIN

Name

Sector

Market Value

Weight (%)

Maturity

US912796SB68 TREASURY BILL Cash and/or Derivatives $5,493,095,698.29 25.86 Aug 01, 2019
US912828XE52 TREASURY NOTE Treasuries $978,638,172.86 4.61 May 31, 2020
US912828WW69 TREASURY NOTE Treasuries $886,409,678.02 4.17 Jul 31, 2019
US912796RV32 TREASURY BILL Cash and/or Derivatives $846,052,953.85 3.98 Jun 27, 2019
US912828VF46 TREASURY NOTE Treasuries $828,386,259.96 3.90 May 31, 2020
US912828MP29 TREASURY NOTE Treasuries $820,777,804.27 3.86 Feb 15, 2020
US912828LJ77 TREASURY NOTE Treasuries $816,803,957.24 3.85 Aug 15, 2019
US912828ND89 TREASURY NOTE Treasuries $774,658,496.84 3.65 May 15, 2020
US912828K585 TREASURY NOTE Treasuries $728,169,848.39 3.43 Apr 30, 2020
US912828D804 TREASURY NOTE Treasuries $674,058,298.77 3.17 Aug 31, 2019

(Source: iShares.com)

One other point I would like to stress is the duration of the treasuries themselves. Just about six months ago, the Fed was raising its fed funds rate, and the short-term rates were rising. Market pundits were having a field day with warning long-term bondholders about the rates heading higher. Now, yields have actually fallen as of late, and talks of higher rates have halted. I am still a believer that you want to own shorter-term rate instruments due to the fact of we just don't know what the Fed will do long term. One must not forget, the market is the ultimate yield decider when it comes to the long-end of the curve, not the Fed.

Risk Metrics

When looking at any fund or any security for an investor at my firm, I always print off a risk metric report and go over it with them. Let's take a look at the table below which outlines some of the most used risk metrics out there:

Metric Percentage
Arithmetic Mean (monthly) 0.05%
Arithmetic Mean (annualized) 0.62%
Geometric Mean (monthly) 0.05%
Geometric Mean (annualized) 0.62%
Volatility (monthly) 0.10%
Volatility (annualized) 0.34%
Downside Deviation (monthly) 0.01%
Max. Drawdown -0.12%
US Market Correlation -0.27
Beta(*) -0.01
Alpha (annualized) 0.67%
R2 7.46%
Sharpe Ratio 0.54
Sortino Ratio 1.38
Treynor Ratio (%) -20.33
Calmar Ratio 18.30
Active Return -7.34%
Tracking Error 15.74%
Information Ratio -0.47
Skewness 3.01
Excess Kurtosis 14.47
Historical Value-at-Risk (5%) -0.03%
Analytical Value-at-Risk (5%) -0.11%
Conditional Value-at-Risk (5%) -0.05%
Upside Capture Ratio (%) 1.12
Downside Capture Ratio (%) -1.91
Safe Withdrawal Rate 8.55%
Perpetual Withdrawal Rate 0.00%
Positive Periods 89 out of 137 (64.96%)
Gain/Loss Ratio 5.16

(Source: PortfolioVisualizer.com)

The ratio that catches my eye right off the bat is the U.S. market correlation figure. This ratio gives us an idea of how it reacts with the overall equity markets. With a reading of -.27, the ETF is not correlated with the markets at all, and is actually negatively correlated. When you are building a portfolio and looking for diversification, you want funds that are negatively correlated to your equity holdings. Looking at the monthly and yearly volatility ratios, you can see there is almost no volatility. The monthly volatility ratio shows a .1% move in share price, and a .34% movement yearly in share price. We can conclude that there is barely any price fluctuation in the fund.

One risk that doesn't show up in my risk metric table is interest rate risk. When thinking of interest rate risk, most investors think of fund price devaluation due to higher rates. Instead, the risk here is that the Federal Reserve would lower the fed funds rate, causing the short-term yields back below the two percent mark. This is the only risk I see going forward in the next twelve months with SHV.

Summary

If you are retired and looking for an alternative to cash, the SHV could be a great option for you. The iShares Short Treasury Bond Fund is for those looking for ultimate safety, and who want to build a diverse bond portfolio. An ETF like this is best suited for a money market alternative, or just a way to reduce risk of your overall portfolio. With short-term yields still over 2%, SHV can be a solid choice for you to keep the cash in your investment account while not locking it up with a financial institution offering a free toaster. I like a free toaster, but I like the safety of U.S. treasury bills the most.

Disclosure: I am/we are long SHV. 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: Ortner Capital consults clients who own SHV. These opinions are of Mr. Josh Ortner, CTFA. Please consult a certified professional before making any investment decision based off this article.