Investors could be forgetting about a good chunk of their wealth as they let cash just sit in the brokerage accounts. Alternatively, one may utilize an ultra-short-duration bond ETF as a way to put that cash to work and capture more attractive yields and risk-adjusted returns.
On the recent webcast, Don’t Let Your Cash Get “Swept” Away, Jerome Schneider, PIMCO’s Head of Short-Term Portfolio Management, explored an alternative approach to liquidity tiering, uncovering opportunities at the front end of the curve to help investors better manage portfolio volatility without giving up the prospect of attractive risk-adjusted returns.
Schneider noted that North America has reached in inflection point in the growth of ETFs with the new wave of commission free platforms. Brokerage platforms like Schwab, TD Ameritrade, E*Trade, and Fidelity eliminated commissions for stocks, ETFs, and options listed on U.S. and Canadian exchanges, allowing investors to quickly invest without worrying about piling on commission fees. However, many investors still keep a large chunk of their money in cash on these platforms. For example, about 11.4% of assets at Schwab sits in cash and money markets, and a monthly survey conducted by the American Association of Individual Investors showed the average retail investor holds 15% of their investable assets in cash
“Cash is now a major focus and many investors are re-thinking their approach to managing cash,” Schneider said.
“Investors should not be complacent with their asset allocation – it is important to optimize your cash,” he added.
Many investors have also funneled money into money market funds after a volatile year – Morningstar category flows show that year-to-date inflows to money market funds have already more than doubled that of total inflows for 2018. However, Schneider warned that many may not be aware of the drawbacks associated with traditional money market funds, such as the floating net asset value, potential gating in times of stress, credit risk and poor diversification exposures.
Alternatively, investors can find opportunities through dedicated ETF strategies that could act as good cash alternatives and generate some decent returns along the way.
“By taking a step out on the risk spectrum, investors can seek other short duration – strategies that potentially increase yields and diversify exposures,” Schneider said.
For example, one can consider the actively managed PIMCO Enhanced Short Maturity Active ETF (NYSEArca: MINT) and the PIMCO Low Duration Active ETF (NYSEArca: LDUR) to provide additional yield beyond cash holdings. MINT shows a 0.64 year effective duration and a 2.10% 30-day SEC yield. LDUR has a 2.64 year effective duration and a 2.25% 30-day SEC yield.
Schneider argued that actively managed liquidity in short duration allocations can potentially preserve liquidity for spending needs, defend against volatile markets, generate added portfolio income, harvest incremental return beyond money markets and Treasury Bills, and maintain liquidity and purchasing power for opportunistic allocations.
“A steep yield curve exists just beyond the max maturity limit of money market funds. Investors that can step outside of this are rewarded with a broader array of securities, better risk-reward profiles, a steeper yield curve and opportunity for rolldown and capital appreciation,” Schneider said.
Financial advisors who are interested in learning more about short-duration bond strategies can watch the webcast here on demand.