SLQD - SHV: A 4.5% Yield To Park Cash That Makes Sense

2023-03-12 09:42:14 ET

Summary

• It is still not the time to take duration or credit risk.
• But 4.5% yield to park cash makes sense here.
• SHV is the place to park your money as you look for fixed income opportunities over the next year.

We covered iShares 0-5 Years Investment Grade Corporate Bond ETF ( SLQD ) earlier this year. We concluded with an ambivalent stance, showing a preference for the even more shorter duration Bloomberg Barclays 3-12 Month T-Bill ETF ( BILS ) which offered a comparable yield instead.

The choice between these two comes down to how you see things evolving. If you believe the Federal Reserve will start cutting rates aggressively on economic weakness and credit spreads will generally not widen, then SLQD makes sense. We disagree with both points here. The first being that we think inflation will be a bit sticky and the Federal Reserve will hesitate to be aggressive in delivering rate cuts on a tight labor market. We see this as likely even if we have economic weakness. If we are incorrect about that and rate cuts come in fast and furious, we think credit spreads will blow out everywhere, including on the short side of the investment grade curve. Again, you don't want to own SLQD before that happens. At present we think BILS offers an extremely good alternative to SLQD and we would wait for the aforementioned credit event to dive into SLQD.

Source: SLQD: Why We Prefer BILS Here

BILS came out slightly ahead since then, but both were more or less flat.

Today we will talk about the third ticker in the above chart. iShares Short Treasury Bond ETF ( SHV ) is similar to BILS. It invests in Treasury Bonds that mature in less than a year.

Fund Basics

This 23 billion ETF had 28 holdings at last count. The underlying holdings collectively have a yield to maturity (YTM) of 4.77%. While the income is reflected by the YTM, after accounting for the expenses, around 4.54% is left with the fund and is indicated by the 30 Day SEC Yield.

Point to note is that the published expenses of the fund amount to 0.15%, which is less than the difference between the YTM and SEC Yield. The SEC Yield represents the income/expense action of the preceding 30 days, so may be impacted by the timing differences of the two. The 12 month trailing yield in the above graphic is 1.99%, however, the impact of the higher earnings shows up with a lag on the distributions to the unitholders. We can see the rising monthly pay-outs over the last year.

Using the latest distribution, we already get a yield of 3.17%, which is quite a bit higher than the trailing yield. Expect the fund to yield closer to its current SEC yield within a year. With an effective duration of 0.30 years, the fund holdings hardly get impacted by the interest rates. Duration risk represents the reactionary impact on the bond prices to the change in rates and the two are inversely related.

Performance

SHV has performed as expected in comparison to its benchmark, ICE Short US Treasury Securities Index.

It's a job well done considering that the index does not have any expenses, unlike the fund. Of course if a sub-1% annualized run-rate excites you, then you are different compared to the vast majority of investors.

Outlook & Verdict

Our readers will probably get a Deja vu, but we will go ahead and reiterate our current macro thoughts anyway. We do not expect the Federal Reserve to start cutting rates until the labor market loosens materially from these levels. We also expect the credit spreads to widen and do not think this is the time to invest in longer duration fixed income securities.

Funds like SHV and BILS offer a safe haven for investors to wait it out and earn close to 5% for parking cash. This yield will likely move up as the Federal Reserve hikes again. As we shared with our Marketplace subscribers this week, we think that end is now finally in sight for the rate-hiking campaign. Several of our indicators finally fired off simultaneously and suggest we will see a lot of data weakness in the months ahead. That should finally force the Federal Reserve to the sidelines.

Of course, a stop in hikes should not be equated with the start of a rate cutting cycle. Nonetheless, fixed income is likely to provide better opportunities in the months ahead. With that in mind, we hiked our fixed income allocations and also purchased a solid, investment-grade, 8% yield . Over the course of the next few months we will use the cash liberated from our covered call portfolio to buy more fixed income. Investors can similarly park some cash in SHV or BILS and as credit spreads widen and corporate fixed income securities get more attractive, they can steadily deploy in that area.

Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.

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