Bear Market Thoughts: A Look At The 'Cash-Alternative' ETFs

Summary

• 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.

(Source)

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.

Data by YCharts

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.

Data by YCharts

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.

Data by YCharts

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!

Data by YCharts

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."

Data by YCharts

Conclusion

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!

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.

Comments

[toromi]

Thanks for this article. But if you want an ETF that's as close a possible to cash, you need something even more conservative like BIL (SPDR Bloomberg Barclays 1-3 Month T-Bill ETF -- a mouthful, I know). If you compare BIL to any of the options you mentioned, the chart for BIL looks like the electrocardiogram of someone who died. It's almost perfectly flat. The others look wildly volatile by comparison. BIL had no steep drop (or any meaningful drop) in late March like the others experienced. The tradeoff is that its yield is now < 0.2%. But if you're looking for the ETF equivalent of money in a mattress, BIL would be my pick.

[Nick Ackerman]

Thank you for taking the time to share your thoughts!

[jackmaster20]

toromi

Then why not just hold cash....???????????

[toromi]

@jackmaster20 Because BIL still pays a higher yield than the 0.01% currently paid by the cash options in my brokerage accounts. And since I can trade with zero fees there's no cost to moving money in and out of BIL.

[NV_GARY]

I'll take MGF - nearly all Gov't issue/backing & a managed 7.25%. NAV stable/rising, div increasing. Roc not used last mo, but was this month, again rising NAV so n problem for now.

[Nick Ackerman]

Thank you, @NV_GARY ! Good luck!

[toromi]

You have to be careful with funds from MFS because several of them return capital and thus have declining NAVs over time (this is the only way you can have a 7%+ distribution from a government bond fund that doesn't use leverage). If you check the 10 year NAV chart for MGF you can see the steady decline. MIN is another popular bond fund from MFS that has the same issue.

[RD1300]

I used MINT for a while but switched to BSV, price holds up better and currently yielding 2.23%

[Nick Ackerman]

Glad that is working out for you!

[jazznut]

SHV, SHY, and IGSB are other options to be considered, but none of these offer much in yield.

[Nick Ackerman]

Thank you for the additional options!

[Stanford Chemist]

Thanks for covering this piece for our Income Lab members @Nick Ackerman !

[Nick Ackerman]

Thank you, @Stanford Chemist !

[Bogus Man]

How about SPSB ?
Been rock steady for months and months
but took the big dip for the same reason 
you mention for your three amigos.
By the way, thanks for mentioning the “raise cash in a crash”
as that makes sense for SPSB price action.
However, SPSB (quick) recovery looks way better than your three musketeers.

[Nick Ackerman]

Yes, that certainly looks like another one that would fit this group. Thank you for pointing it out!

[User 49135130]

I can keep cash under my bed. An ETF, not so much.

[Nick Ackerman]

Thank you, @me_too ! Certainly, I hope you keep it in some sort of interest-bearing account and not literally under your bed. Although the rates have been coming down since the Fed cut (and probably will continue to drift lower,) you can still find savings paying 1%+.

[Rowbearto]

@Nick Ackerman Looking into the dividends these funds are paying, I noticed that the latest div. from JPST dropped substantially from $.091 to .075. ~18% haircut ( TDAmeritrade shows latest div. @ $.06 ) MINT and NEAR dropped as well but not quite the same %. You did point out that yields will "continue a downward trend from here" but it seems like that was a very notable drop for JPST. That could very well produce downward pressure on it's share price.

[Nick Ackerman]

That is quite a drastic cut and more substantial than I would have initially imagined. However, since it is an ETF, the structure will keep the fund trading near its NAV. That is regardless of the selling pressure since they don't typically show discounts and premiums for extended periods of time.

[fujilomi]

I park my cash in cash. For me, not worth tying up money in ETFs with relatively low yields and might actually lose value, or ultra safe stuff like short term Treasuries or CDs for less than .5%. Plus cash gives you the most flexibility in this very volatile market.

[Nick Ackerman]

That's understandable! Thank you, @fujilomi !

[m63333]

I parked my cash in SHV and it seems to be increasing in value. Although this may technically be a bond fund

i have a little in SHY as well which is short term bonds

[Nick Ackerman]

Thank you for sharing, @m63333 !

[JES]

You advertise these as “a place to park cash” or an
“ alternative to cash” and then you compare them to the SPY and say they did quite well,
You should only compare them to cash. No so good. If I kept cash I also have funds to

[mickelsson]

Cash is currently losing 1.5% per year in inflation. It lost 2.3% in 2019.

[Nick Ackerman]

Thank you, @mickelsson !

[Nick Ackerman]

@JES needed a barometer of "being invested," thank you for your suggestion though!