The Risk in Overweighting Money Market Funds | ETF Trends

Money market funds have garnered more than $1 trillion in flows this year as investors have flocked to safety and appealing yields. While some degree of cash allocation is appropriate, investors may have gone too far. An overweight allocation towards money markets may make sense for investors with near-term liquidity needs or very short investment horizons. However, for the bulk of investors with longer-term horizons, it may not make sense as money markets do not offer the same potential benefits that bonds do. With industry assets now approaching $6 trillion, this dynamic in today’s market is worth examining more closely.

Money Market Funds, Cash, and the Case for Bonds

Yes, cash offers liquidity. When it comes to equity drawdowns, however, bonds have outdone cash overall. What’s more, bonds may be better suited to this particular moment in the cycle vs. cash. With yields being near the highest levels in 20 years and the Fed potentially near the end of a rate hike cycle, bonds are well-positioned to outperform cash. Since 1981, bonds have outperformed a cash proxy in the months following the Fed’s last rate hike.

The Market Cycle and Bonds vs. Cash

Historically, where bonds have performed best relative to other asset classes has been in recession.  Should that recession hit, though, bonds also have outperformed cash in the recessionary part of the overall cycle. While a possible recession has not hit yet, it remains perhaps the key potential risk facing markets looking ahead to 2024.

Taken together, these factors may add to the case for shifting client allocations. Advisors may want to consider rebalancing cash in money market funds or adding more to bond allocations. They could consider ETFs as one route in, with the Fidelity Total Bond ETF (FBND) one intriguing example.

See more: “Consider High Yield Bond ETF FDHY”

FBND will hit its ten-year mark next year, charging just 36 basis points (bps) for its active approach to the total bond market. Bond markets are inefficient and an active approach could be particularly useful for investors looking to navigate a shifting fixed income landscape. It could also provide the potential to outperform, as well, leaning on experienced managers to identify potent opportunities. For advisors looking at their client allocations for 2024, it may be time to reassess an overweighting to cash.

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