GBIL - GBIL: Where To Park Cash To Keep Your Gunpowder Dry And Earn Income

Summary

• Some ultra-short duration funds are starting to look attractive vs their floating rate counterparts, especially if the Fed becomes less aggressive.
• GBIL has a low duration and a net indicated yield which continues to increase each month.
• Distributions continue to increase; from roughly $0.146/share in early September to just over $0.27/share early this month.

It is no secret that 2022 has been a pretty tough year for bulls with many stocks not only posting negative equity returns, but negative total returns as well. This, coupled with the fact that the bond market has experienced total return losses across the maturity range has left very few places for investors to park their money, without having to part with their money.

During turbulent times, it is key to have mechanisms available to one's portfolio so that preserving capital can be done in an efficient manner. For most investors this is accomplished via the sweep function that their broker offers, and which usually leaves the investor with one of two options when opening the account:

1. FDIC - an insured sweep deposit backed by the Federal Deposit Insurance Corporation
2. SIPC - an insured sweep deposit backed by the Securities Investor Protection Corporation

Historically (pre-2008/2009), SIPC sweeps paid considerably more as they utilized money market funds and had a decent spread to offer investors. Today that is not necessarily the case, as some clients have showed us instances where the FDIC and SIPC were paying the same rate at certain custodians. We highlight this, only to point out that regardless of the sweep election many investors have made on their brokerage accounts, the yield being paid on those captive accounts and dollars is still extremely low.

So Why Is Any Of This Important?

We think that the rates paid on brokerage accounts for cash balances is important because for many investors their passiveness is causing them to miss out on low hanging fruit. With some brokerage accounts paying out less than 30 basis points in earnings right now, we think that the Goldman Sachs Treasury Access 0-1 Year ETF ( GBIL ) offers a way to generate additional returns while waiting to deploy one's firepower. The default option on some of the sweeps we have looked at is to earn around 30 basis points (this does depend on the size of the account and overall cash balance), but for investors utilizing the Goldman Sachs Treasury Access 0-1 Year ETF, they can pick up a fund with a current 3.25% net indicated yield - almost 300 basis points higher than some brokerage account sweeps!

To put that in perspective, an investor with $10,000 utilizing the Goldman Sachs Treasury Access 0-1 Year ETF rather than their brokerage sweep could realize an additional $300 per year if the 300 basis point spread held up for an entire year.

Why Go "Long" Now?

For readers who follow fixed income markets and the ETFs/mutual funds within the space, it was quite obvious a few months ago that a few of the funds went too long when chasing yield in the aftermath of COVID and were caught off-guard when the U.S. Federal Reserve started to not only raise rates, but raise them aggressively. Many supposedly "short-duration" funds posted negative total returns and saw their distributions rise slowly because they had extended out ahead of the rate hikes.

GBIL has had to work through some low yielding (not to be confused with coupons here) bonds and holdings which were purchased at rich prices, but now we think this might be one of the better tools out there for readers looking to pick up some yield. Further, by giving up about 25-50 basis points (net indicated yield) on the front end currently, we think could result in higher yields than shorter instruments on the back end of this play. While one could try and hop between funds, we think creating a diversified portfolio of these is best and then to stick with them until you need your cash back. We have already utilized the WisdomTree Floating Rate Treasury Fund ( USFR ) and some other treasury funds and individual treasuries, but if the market sentiment turns out to be correct and the Fed is forced to lower rates in 2023 then we suspect that the yield curve will normalize and the current yield outperformers will become underperformers and names such as the Goldman Sachs Treasury Access 0-1 Year ETF will once again have a higher yield.

We would point out that the yield is already catching up and closing the gap that previously existed due to the Fed's initial shock-and-awe rate hikes, so we feel pretty good about our thinking on how this will play out. The wild card of course is what the Fed actually does, and that largely depends on their ability, as well as U.S. lawmakers', to fight inflation without crushing the economy.

Fund Structure

The Goldman Sachs Treasury Access 0-1 Year ETF holds the following positions:

The fund's positioning is structured to take advantage of the current rate hikes, with almost 55% of its holdings set to mature by mid-March (so the majority of the portfolio is basically inside of 3 months). Another positive, with the current curve structure, is that the methodology behind the ETF is enabling it to take advantage of the highest yields on the curve (around the 1-year area) without being forced to buy on the inverted portion of the curve.

With a duration of 0.34 and a yield-to-maturity (and yield-to-worst) of 4.08%, we think that this ETF offers investors the best of both worlds; enough short-term holdings to not get left behind by floating rate offerings but enough current yield to also make sticking around while the yield curve normalizes worth the wait.

Final Thoughts

We have previously highlighted the Goldman Sachs Treasury Access 0-1 Year ETF on July 21, 2022 where we had it listed as a 'Hold' and then again on September 27, 2022 when we listed it as a 'Buy' . Our call on floaters was correct and that has provided some decent performance for cash, but we recognize that the easy money there has been made and that at some point rotating into offerings with a bit more duration will eventually revert to historical norms and provide higher yields.

To be clear, we are still holding other short-term, cash-like instruments but we think that the Goldman Sachs Treasury Access 0-1 Year ETF is structured in a way that investors can now use it to take advantage of its current structure and positioning. It will have floating-like resets each month over the next three months (due to the maturities being reinvested at higher rates), but it should also revert to historical norms where it provided higher yields than floating rate funds, etc. once the yield curve normalizes.

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