An ETF Solution to the Corporate Cash Problem | ETF Trends

There’s a lot of mattress-stuffing in the markets these days as corporations and individual investors alike hoard cash in favor of safety. That cash is being held largely in money market funds, which some argue is only marginally better than the proverbial mattress.

It’s been estimated that corporations are currently sitting on a record $1.8 trillion in cash. That number may grow, too: a report showed that over the next six months, 30% of corporations plan to increase the cash stockpiles while 47% plan to stay where they are. Just 23% plan to decrease it, according to Treasury Strategies. The full report can be downloaded here.

The problem is this: that cash isn’t earning its keep by providing a viable return for these entities.

Behind the Hoarding

Jerome Schneider, executive vice president of PIMCO, says that these piles of cash have multiple implications for investors.

“What we see right now is that the market has been in a defensive posture, waiting to see what ‘the New Normal’ might bring.”

Until the answer to that question comes to light, investors are maintaining abundant liquidity while forsaking any yield by being invested in traditional money market funds..

Blame the economic indicators for the hiding out. The reports are confusing to even the most experienced portfolio managers. “You see a lot of cash sitting on the sidelines because conviction is lacking to make allocations to specific strategies, whether capital investment or R&D, at the moment.”

The cash-hoarding could linger as long as the economy is absent of clear signposts about how things are really going, too.

In the end, though, corporations are doing little different than individual investors these days:  “People are just a little more cautious about how they’re thinking about their spending and personal finance decisions.  Individuals are asking whether it’s safe or not to take on additional risks in there financial as well as everyday lives.”

The Problem

Although stockpiling cash is an understandable response to economic uncertainty, keeping it in regulated money market funds robs investors and corporations of yields.  Lower interest rates combined with what money market funds can invest in (only high-quality, highly-liquid instruments) has pushed money market yields to nearly zero.

This has had an impact on portfolio returns for corporations, tax-exempt institutions and individual investors alike, says a report on the subject produced by PIMCO.

The result? Holding pure cash becomes expensive compared to holding near-cash alternatives.  With yields so low, the cost of insurance to have absolute liquidity can be decisively expensive for investors.

The Solution