2023-11-30 10:01:09 ET
Summary
- Cash is king.
- Yields on cash and cash alternatives are quite good, with rock-bottom risk.
- A quick look at four cash alternative funds follows.
Federal Reserve hikes have caused yields to spike across fixed-income asset classes. Short-term cash vehicles have been one of the top beneficiaries, with yields surging to +5.0%. Due to the strong yield on offer by these funds, and owing to reader interest, I thought to have a quick look at some of the better cash alternative funds on offer. Four funds stand out.
The SPDR Bloomberg 1-3 Month T-Bill ETF (NYSEARCA: BIL ), a simple vanilla t-bill index ETF. A good, simple choice. Investors can't go wrong with t-bills, but I do think there are slightly stronger choices out there.
The Vanguard Federal Money Market Fund ( VMFXX ), a money market mutual fund. Yields marginally more than BIL, but has a $3,000 minimum investment, and is a bit less liquid.
The JPMorgan Ultra-Short Income (NYSEARCA: JPST ), an actively-managed ultra-short income ETF. Yields marginally more than BIL, but is marginally riskier as well.
The Alpha Architect 1-3 Month Box ETF (BATS: BOXX ), which achieves extremely similar returns to t-bills through options. Returns are marginally higher than BIL, and the fund has some potential tax benefits.
Of these, BOXX seems like the strongest choice, at least for investors facing high tax rates in taxable accounts.
A quick table for the funds above.
BIL - Simple T-bills Index ETF
BIL is a simple t-bills index ETF, with all the characteristics, benefits, and downsides one would expect from such a fund.
Credit risk is effectively nil, barring an unprecedented U.S. government default.
Interest rate risk is also effectively nil, as these securities have very low maturities, of one month on average.
T-bills themselves have more or less no volatility, ensuring safe, stable capital for investors. BIL's volatility is extremely low too, and most of it the result of (temporarily) retaining cash within the fund before distributing it to shareholders. Drawdowns are extremely low as well.
T-bills currently yield 5.3% to 5.5%:
The fund itself yields 5.4%:
Importantly, t-bill yields are currently very competitive. T-bills yield more than longer-term treasuries, especially those of moderate maturities:
BIL itself yields a bit more than the average bond or treasury. Most corporate bonds yield more, but these have higher credit and interest rate risk than t-bills.
T-bills and BIL are a solid choice for more risk-averse, short-term investors and retirees. Still, I do think investors can achieve marginally stronger returns, while minimizing risk and volatility, by focusing on other funds. Let's have a look at some of these.
I last covered BIL here .
VMFXX - Simple Money Market Fund
VMFXX is a simple money market mutual fund. As a money market fund, VMFXX focuses on very short-term securities from credit-worthy institutions. VMFXX focuses on t-bills, same as BIL, and loans/notes to government-sponsored institutions, including Federal Home Loan Banks .
VMFXX credit and interest rate risk are both extremely low. One could argue that t-bills are (marginally) safer than money market funds, but credit quality is so high, and maturities so low, that any difference is tiny, almost inconsequential. In my opinion at least.
T-bills tend to yield marginally less than securities with similar characteristics, due to their liquidity and perceptions of risk. Money market funds, including VMFXX, can focus on said securities, marginally boosting yields. VMFXX itself yields around 5.4%, and 0.05% more than BIL.
Due to the above, VMFXX tends to slightly outperform BIL, as has been the case since inception, and for the past decade.
VMFXX's mutual fund structure reduces liquidity, with the fund only trading at the end of the day. The structure also (potentially) allows the fund to maintain a flat $1.00 share price, as has been the case since the fund's inception.
Investors in VMFXX must make a $3,000 minimum investment.
VMFXX offers competitive yields, same as BIL.
In my opinion, VMFXX is a marginally superior investment opportunity to BIL. Both are very similar choices, however.
As an aside, I chose VMFXX over other mutual funds as it had the highest yield. I might have missed a fund or two, and yields do vary as well.
JPST - Ultra-Short Income ETF
JPST is a simple ultra-short income ETF. It focuses on short-term investment-grade corporate bonds, with sizable investments in CDs, commercial paper, asset backed securities, and treasuries.
Interest risk is very low, with the fund sporting a duration of 0.60 years.
Credit risk is very low too, with the fund focusing on securities rated A, and higher.
JPST is an incredibly safe, stable fund, although it is materially riskier and more volatile than BIL. Compare JPST's volatility with that of the average bond, and with that of BIL.
JPST also suffered a sizable 3.2% drawdown in 1Q2020. Share prices mostly recovered after a few weeks, and recovered totally after less than three months.
In my opinion, JPST is sufficiently safe and stable to function as a cash-replacement ETF. Volatility is generally quite low, and Covid era drawdowns were an exception. Some of the most risk-averse or short-term investors might disagree.
JPST's marginally higher level of risk results in a marginally higher yield, with the fund currently yielding 5.6%-5.7%. From what I've seen, spreads to t-bills tend to be a bit wider.
Higher yields means higher returns, with JPST moderately outperforming relative to BIL and VMFXX since inception. Outperformance was particularly strong in prior years, when benchmark rates were at zero and spreads mattered more.
JPST offers competitive yields, same as BIL and VMFXX.
JPST is marginally riskier than t-bills, and yields marginally more too. On net, I think the result is quite positive compared to BIL, but this ultimately depends on the desired risk-return profile of each investor.
I last covered JPST here .
BOXX - T-Bills With Options
BOXX is a complicated fund. I'll give a quick summary of how it works in this article. The fund has a more in-depth explanation here , I have my own here .
BOXX buys and sells options, mostly on the S&P 500, but also in some individual equities. Options are selected so as eliminate all market risk, by combining long and short positions in calls and/or puts. Options are selected so as to have negative cash-flows at first, and positive cash-flows a short while later. Doing so is effectively equivalent to a short-term loan with no market risk. As markets are (generally) efficient, said arrangement should generate about as much in returns as t-bills do, as is in fact the case.
Returns are very slightly higher, in my opinion due to the complexity and perceived risk of these strategies.
As should be clear from the above, BOXX's returns are extremely similar to those of BIL. BOXX does have two advantages.
First, returns are marginally higher, as evidenced by the fund's higher yield (to option expiration) and stronger total return track-record.
Second, the fund provides some potential tax benefits to some investors. BOXX's strategy sometimes avoids generating any (taxable) net investment income or realized capital gains, allowing the fund to retain any and all income within the fund. BOXX does not currently pay a dividend, as expected.
Investors in BOXX can choose to hold the fund long-term, potentially delaying taxes until a moment of their choosing. Doing so could, potentially, result in tax savings.
BOXX's potential tax benefits are the fund's most important advantage relative to BIL. Said advantage is quite important, but very uncertain, and ultimately dependent on the specific characteristics of each investor.
I last covered BOXX here.
Conclusion
Short-term cash and cash alternative funds offer investors strong yields with extremely low risk. I've given a quick rundown of four such funds in this article. Hopefully this was of use and interest to readers.
For further details see:
4 Cash Alternative Funds, For Conservative, Short-Term Investors