- There are three cash-alternatives that we are going to take a look at today; MINT, JPST and NEAR.
- These ETFs appear like they had some significant losses, but relatively speaking they were quite shallow.
- The "mirage" is that they have had quite flat share prices for years so dips look "massive."
- This idea was discussed in more depth with members of my private investing community, CEF/ETF Income Laboratory. Get started today »
Written by Nick Ackerman, co-produced by Stanford Chemist
We have discussed many times in the past looking for places to park cash. Some of the funds we highlighted were; PIMCO Enhanced Short Maturity Active ETF (MINT), JPMorgan Ultra-Short Income ETF (JPST) and iShares Short Maturity Bond ETF (NEAR). We have seen what looks to be "massive" drops in their share price through this latest COVID-19 induced crisis. Though, I would argue that they still performed rather well and as expected. They dropped but still provided a significant buffer to what an investor's drawdown could have been. This then provided an investor that was brave enough to jump into closed-end funds at some significant discounts.
I want to be clear though, even as the Fed is providing unprecedented support - it doesn't mean we are completely out of the woods yet. I'm not sure if the lows are in or not, but I do know that we have finally seen the pullback in valuations that we have wanted to see for a while. If you are still leery of the market, having some funds in these "cash-alternatives" could be warranted. I just wouldn't hold too high of an allocation - especially those with a longer-term investment horizon. It isn't important that you pick up shares of funds at an absolute bottom to still put up respectable returns over time. I highlighted my thoughts on long-term investing previously.
These funds have been steady for years, before "massive" drop. To put this massive drop into perspective though, I wanted to put the performance into perspective. It isn't nearly as bad as one would imagine. Although, if an investor was looking at these as a "cash-alternative," this might be a bit more volatile than they would like. I would argue, however, that we can still utilize these positions for a safe place. That's because these still held up relatively well. They provided shallow declines while we could pick up funds at some steep discounts in the CEF space. Below is a chart of the last 3-year price change only. This is not including all the monthly dividends they paid along the way.
The drawdown from February 19th to March 23rd is a reflection of the market's peak - to the lows set so far. As we can see JPST and MINT held up better than NEAR. NEAR has a duration of 0.53 years. JPST is last reported at 0.51 years. MINT comes in at a very short 0.22 years. So that isn't necessarily what caused the disparity in performance. Duration is the measure of sensitivity to changes in interest rates on the underlying bonds. With this in mind, I would probably gravitate towards JPST or MINT as a more reliable "cash-alternative." All three have varying allocations to investment-grade bonds, asset-backed securities and U.S. government debt.
Now we can take a look at the same February 19th to March 23rd period, and put it against the performance of SPY. Of course, we see quite the discrepancy in performance. This is exactly what we would expect. However, we generally wouldn't expect those short-term ETF instruments to act the way they did either.
To explain the "massive" drop in these funds I believe it can come down to the need to raise cash. As the market was collapsing investors - large and small - needed to raise cash. These positions were likely the only things that had respectable value left. Thus, they became a source of liquidation. These drops are then compounded by the fact that everyone is rushing to liquidate their position at the same time. Therefore, leaving very little "buyers" to actually prop up the price. In fact, the creation and redemption function of ETFs appeared to have "broke" during this time. Typically, we see the share price and NAV's of ETFs stay very close together. This is in contrast to CEFs when we can see wide discounts and premiums.
This further helps explain why these ETFs "blew out." Relatively speaking, we know it wasn't by a large amount but looks worse than it appears when their share prices were relatively flat for years. This creates a type of mirage when looking at their charts.
The other thing to remember is that these funds are relatively newer too. We didn't get to see how they would react in a crisis - now we do. In fact, Stanford Chemist had highlighted as much in his coverage of MINT.
...in a GFC-type situation, the damage could potentially be considerably worse. Hence, investors should be reminded again that MINT should not be considered as truly "cash".
To be quite honest, it doesn't change my opinion on them either. I still believe they are a decent place to park cash for a short period of time. A short period of time just until we see a better opportunity to invest. That's what cash and cash-alternatives are designed for anyway. They aren't supposed to be long-term investments, at least in my mind!
In fact, when we look at the YTD returns of all three funds we can see that they aren't really too far off from where we began. Yes, they are still down though. This is something to consider when looking for a "cash-alternative." They do still have some risk as they are invested in securities that can change in price. Even if they are ultra-short or short term investments with government backing. Cash is cash and nothing can beat that. But these funds aren't a terrible place to park some funds to rotate into better opportunities when they are presented.
Looking at the dividend yields of all three funds, we can see that we are starting to arch downward. This is to be expected as the Fed cut their target rates to a range of 0 to 0.25%. That means we should continue to see the yields on these funds continue a downward trend from here. Though we do see the slight spike in yields when these funds "collapsed."
Cash is cash - so these "cash-alternatives" can be attractive but they are certainly not risk-free. That's to say that they definitely aren't cash and guaranteed. We now know how these funds will react in a crisis too. I would say they actually perform quite as expected and admirably. The drop was further compounded by the fact we saw discounts open up on the ETFs. This isn't typically something we see to a significant degree in the case of ETFs. CEFs on the other hand, this is something we experience all the time. In fact, that is exactly what we try to exploit with CEFs to gain alpha.
So for short periods of time, I still see these as attractive places to put funds for those that are leery of elevated market levels. That is only for a short period of time though, as opportunities open up as we saw in March - I would be reducing a cash-alternative type position. We certainly could go lower from here too. I'm aware of that, but I still wouldn't have too high of exposure at this moment. The valuations in some of the CEFs are just too attractive at this time. I do hope many have taken advantage of some of March's lows!
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This article was written by
Nick Ackerman is a former financial advisor using his experience to provide coverage on closed-end funds and exchange-traded funds. Nick has previously held Series 7 and Series 66 licenses and has been investing personally for over 14 years.He contributes to the investing group Learn more.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
This article was originally published on April 12th, 2020 to members of the CEF/ETF Income Laboratory.
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