JPST - JPST IGSB MINT: Best Short-Duration Parking Lot

2023-06-07 14:18:09 ET

Summary

• The unprecedented speedy tightening monetary cycle we're still witnessing has caused a tremendous shift in attitude and investing style.
• Following many years of extremely low rates, the death of TINA (not Turner, "there is no alternative") is also marking the resurrection of short-duration investments.
• When deciding which short-duration instrument is best for you, there's a lot more than just looking where you can get paid the most (yield).
• As far as we're concerned, the right instrument isn't necessarily the one that pays the most, but the one that, first and foremost, meets our macro views.
• When an instrument is offering the highest yield, the lowest volatility, and the shortest duration - pointing at "The Chosen One" is becoming an easy task.

This article is predominantly based on trading alerts related to our Funds Macro Portfolio ("FMP") that were sent to subscribers on June 2, 2023 .

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TINA is Dead!

Since the Great Financial Crisis ("GFC") of 2008, for the subsequent 14 straight years, investors have lost their ability to earn decent returns on short-term investments. Bank time deposits, money market funds, and even short-duration bond exchange-traded funds ("ETFs") have all paid very little (to none).

But then inflation started to rise ("temporarily," of course), and when it reached non-"transitory" levels, the Fed had no choice but to start raising rates in what has become the most "Fast and Furious" tightening monetary cycle in modern history.

Suddenly, cash was no longer trash, and finally the "TINA" (= "There Is No Alternative" to stocks) narrative died, about a year before another "Tina" (Turner) did.

In both (TINA-) cases, the death of one (singing/investing) style marked a shift into a new/different style.

With that in mind, the question now is where to put your money?

• Bank time deposit (with the recent regional banks' crisis still fresh in mind).
• Money market fund.
• Short-duration bond ETFs.
• Single bonds where you have full control over the desired industry/sector exposure, rating, duration, and the ability to do your own DD regarding the issuer and follow its financial results.

Since our FMP is only employing funds (ETFs and closed-end funds, or CEFs), the last option (which we are very much in favor of) isn't a valid option for the sake of this portfolio/article. We do invest in (and suggest) single bonds on Wheel of Fortune, however, they aren't and can't be part of the FMP.

Change of Mindset

As we wrote last week:

...tactical (short-term in nature) moves are temporary and our fundamental (longer-term) view hasn't changed; we still believe that this is a high-risk market/environment, one that doesn't support an ongoing "overweight equities" position.

Therefore, it's likely that we're going to sell some, if not all, of those ("tactical" in nature) positions soon, once the (hopefully positive) effect of the debt ceiling agreement takes place.

We were waiting (very patiently) for the positive outcome of the debt ceiling agreement to take full effect. Now, the time has come.

We believe that this is a good time to reduce exposure and become (once again) under-invested for the next few weeks, likely (at least) until the next FOMC meeting (July 25-26).

By that time, we're likely to see another rate hike (based on current expectations), but perhaps even more important than that: Letting the "higher-for-longer" narrative (which is now the consensus) sink in, with FFR at year-end now expected to be the same as it is now.

After having a nice ride over the past month using 3x-leveraged ETFs focusing on Semiconductors ( SOXL ), Regional Banks ( DPST ), Biotechnology ( LABU ), and Small-Caps ( TNA ), we now scale back (again) into a non-leveraged, and an even "under-invested" positioning.

It's important to note that while we shed ~50% of long exposure (inc. the leverage effect) by letting the 3x-leveraged ETFs go - we're also adding ~15.5% net exposure by adding to the existing (non-leveraged) ETFs.

Where's the greatest value right now? In (small-cap) "Value"!…

Which sectors/industries are most suitable for our views for the next few weeks (at the very minimum)? As far as we're concerned, the "green triangle" is where the focus should be.

Big Impact on FMP

The net effect of our recent trades led to a reduction of ~35% in our FMP's net-long exposure. That's a significant amount that obviously mustn't sit idle when the FFR is 5%+ and money market funds are offering a yield in the same ballpark.

Over the past (nearly) three months our cash reserves - whenever we had any - were invested in iShares 1-5 Year Investment Grade Corporate Bond ETF ( IGSB ) because we saw an opportunity with bonds (yields easing) while wanting to keep it safe (short duration, high grade).

This decision has proven itself to be wise, with IGSB outperforming (during the relevant period) other leading, short-duration instruments that we use/view quite often such as PIMCO Enhanced Short Maturity Active Exchange-Traded Fund ETF ( MINT ) and JPMorgan Ultra-Short Income ETF ( JPST ).

Nonetheless, after yields went down indeed during (most of) March, and staying (mostly) flat in April, they started climbing again over the past month, in line with the market realization that the Fed isn't done (hiking) yet, and higher rates are here to stay a while longer.

Why MINT?

When we compare the IGSB, MINT and JPST ETFs, the differences aren't huge, yet we like MINT the most for these reasons:

1) Highest (and steadiest) total return this year.

2) Lowest Volatility and highest TTM Dividend Yield.

3) Very decent Forward Dividend Yield (based on most recent monthly distribution; ex-date for all three ETFs was June 1st):

4) Shortest duration [Source: Website of each ETF]

5) Expense Ratio [Source: Website of each ETF]

This is the only aspect where MINT disappoints.

6) 30 Day SEC Yield [Source: Website of each ETF]

7) Yield to Maturity [Source: Website of each ETF]

Switching (Short-Duration) Horses

Having all of that in mind, we're switching from IGSB to MINT.

Generally speaking, we remain bullish on bonds.

For us, at the moment, the question is neither IF nor WHEN, but rather HOW.

To be more precise, it's mostly (or even only) a matter of what credit rating (IG vs HY) and (short, medium, or long) duration we wish to be exposed to.

The debt ceiling agreement also (among other things) means that the U.S. Treasury is about to issue a lot more debt soon, a move that may push yields higher (even if temporary).

In addition, bonds (e.g., AGG ) are trading in "consolidation mode" (yield-range bound) for quite some time, and they will need to "make up their mind" soon.

We don't imply that yields "must" move higher from here [There are actually good reasons for a move lower: inflation, economy, etc.], but we do feel that we're in an environment that justifies playing safe = IG + short duration.

• Spreads, especially on HY, are still far from being wide enough.
• Fed is (apparently) not yet done hiking.
• We can get nearly 5% on short-term instruments.

Call it a tactical investment in bonds or a good place to place cash - we believe that short-duration instruments are now valid, integral, perhaps even strategic, places to be in.

So, we're switching from IGSB to MINT, which we view as a good place (for not only, but surely for, available cash) to park in until we feel more comfortable taking more risk/exposure into the FMP.

For further details see: