There is something to be said for investors keeping some dry powder. Mohamed El-Erian endorsed the idea earlier this week, saying the bulk of his portfolio is in cash.
But for investors looking to main some semblance of income, liquidating equity and fixed income holdings in favor of cash can be a risky gambit. Some exchange traded funds can help investors smooth the move to increased cash holdings.
“These ETFs live in the space between money-market funds and short-term bond funds. They generally hold all investment-grade bonds from a variety of issuers with weighted average maturities of around a year or less,” reports Eric Balchunas for Bloomberg.
The king of the “cash is king” ETFs is the PIMCO Enhanced Short Maturity ETF (NYSEArca: MINT). Managed by PIMCO Managing Director Jerome Schneider, the $3.68 billion MINT is the largest actively managed ETF.
MINT’s 30-day SEC yield of 0.69% is not jaw-dropping, but that is the tradeoff for a low duration ETF comprised of highly-rated holdings. MINT’s effective duration is just 0.35 years, according to issuer data.
There are regulatory concerns and rules changes to consider with money market funds, including ETFs and mutual funds. Earlier this year, the Federal Reserve expressed concern that money market mutual funds and exchange traded funds could be vulnerable to stress during calamitous market environments. [Fed Concerned About Money Market Funds]
The Fed’s view on money market funds comes as some issuers are reconfiguring such funds to meet new regulatory standards. Fidelity Investments is converting a few of its money funds. Investors who are wary about regulatory repercussions can also turn to ultra-short-duration bond exchange traded funds as cash alternatives.
The changes are coming ahead of new regulations the Securities and Exchange Commission approved that will take effect in October 2016, which require institutional prime funds and institutional municipal money market funds to allow a floating net asset value, essentially breaking the buck or stable $1 share price many have known. [A Look at Money Market ETFs]
Still, ETFs, such as the Guggenheim Enhanced Short Duration Bond (NYSEArca: GSY), are generally considered safe. The $425.2 million GSY juices its yield (and returns) with non-investment grade fare. The ETF holds 15% of its portfolio “in high-yield debt to a portfolio of mostly investment-grade corporate and government bonds that mature in less than a year,” according to Balchunas.
GSY holds 158 securities with an average duration of 0.25 years. The ultra-short-duration bond ETF can be used to weather a rising rate environment. Furthermore, if the consumer prices continue to fall and we end up with persistent deflationary pressures, the purchasing power of the U.S. dollar increases. Consequently, investors can also look at a short-term ETF that act as cash alternatives. [ETF Options to Hedge Against Falling Prices, Low Inflation]
PIMCO Enhanced Short Maturity ETF