Cash Is Not Trash With Active ETFs

Unless you have been living under a rock, we all know that the Federal Reserve has untaken the inflation fighting mantle. With the CPI spiking to levels not seen since the 1980s, the Fed has now moved benchmark rates accordingly. With its last 0.75% hike, the Fed has pushed benchmark rates to over 3.25%. More such hikes are expected, with 4.25% to 4.5% now predicted for year-end.

The surge has caused all sorts of havoc across various markets. Stocks have fallen lower, while bonds have also declined. As rates rise, bond prices fall to match the yields on newly issued bonds at the current rate.

But that rise in interest rates is also having a major effect on a once left dead asset class. We are talking about cash and cash-like equivalents.

It was just a few years ago that cash, money market funds, U.S. Treasury bills, and certificates of deposit were paying essentially zero. This made holding cash a losing proposition for portfolios. However, thanks to their short-term nature, cash and cash-like investments have been able to realize the effect of higher rates quickly.

Right now, T-bills are paying nearly 4%, while money market funds – which CDs, commercial paper, Treasuries, bankers’ acceptances, and repurchase agreements – are paying north of 2%. Yields on both of these products were paying zero at the start of the year.

With yields on cash rising, investors and savers now have a real opportunity to earn some decent returns on their cash holdings. Moreover, the rise in rates makes cash a strategic asset class, particularly with the broader stock market in free-fall.

There are few index options for playing the short-end and cash-like bond market, such as the $25 billion SPDR Bloomberg 1-3 Month T-Bill ETF (BIL). However, due to the nature of the market segment and varieties of bonds/assets, active management has quickly become the way to invest your cash.

Thanks to their ability to not stick to a single index, active managers can seek the best combination of assets to boost yields, manage duration risk, and potentially take advantage of values in the segment. So, a manager can invest in a combination of assets – T-bills plus some short-term corporate debt, maybe a dash of CDs, to create the best combination. With that, investors can be treated to decent current yields. Right now, these money market and limited duration ETFs are playing between 1.5 to 3%, which handsomely beats the rates on savings and sweep accounts.

At the same time, thanks to their short-term nature, share prices for many of these cash-like ETFs have stayed steady throughout their histories. As for expenses, many cash-like ETFs feature ratios below that of traditional money market funds.

Given that cash is no longer trash and can be used as a strategic holding these days, investors may want to consider going active and using an active ETF to get their cash fix. And there are certainly plenty to choose from. Limited duration and short-term bond funds have been one of the biggest launch areas for managers in the active ETF space. For example, AllianceBernstein recently debuted two short-term active bond ETFs last month- the AB Ultra Short Income ETF (YEAR) and AB Tax-Aware Short Duration Municipal ETF (TAFI).

All in all, there are nearly 30 active cash-like and short-term bond ETFs from a wide variety of issuers.

The key to remember is making sure the fund’s mandate lines up with what you truly are looking for. Short-term and limited duration bonds do cover a wide range of maturity dates. The BlackRock Ultra Short-Term Bond ETF (ICSH) and the BlackRock Short Maturity Bond ETF (NEAR) may seem identical, but ICSH features bonds that mature in less than 6 months, while NEAR brings that maturity up to a year. That may not seem like much, but NEAR’s share price has moved more to compensate for the change in benchmark rates.

The idea is to get the best blend of duration risk you’re willing to handle along with the safety/better yields of cash.

With rates rising, cash is no longer a losing asset class. Active ETFs can help investors make the most of their cash investments. As one of the fastest growing and largest categories of active ETFs, there are plenty of cash-like funds available to choose from.

Take a look at our recently launched Model Portfolios to see how you can rebalance your portfolio.