2023-06-14 10:00:00 ET
Summary
- ICSH has outperformed cash parking alternatives like MINT and NEAR.
- It likely comes from its meagre expense ratio coupled with active management.
- It is highly likely to outperform Treasury bills from here, especially as credit spreads widen.
Aiming to meet the income needs of its investors, iShares Ultra Short-Term Bond ETF ( ICSH ) also gives importance to the preservation of capital. Its investors pay 0.08% annually in management fees.
This is really low considering it is an actively managed fund. Most ETFs are run passively, the holdings are picked by sampling and/or on a proportionate basis from a benchmark index. These ETFs aim to track the performance of the index and do not have anyone at the helm strategizing based on the prevailing market conditions. One that comes to mind belongs to the same fund family, iShares 1-3 Year Treasury Bond ETF ( SHY ). SHY charges a nominal 0.15% annually, albeit still higher than our actively managed protagonist. Coming back to ICSH, the fund invests in USD denominated, fixed or floating rate bonds. It does not limit itself to just bonds but also holds money market instruments like commercial paper, certificate of deposit and repurchase agreements or repos.
Fund Website
ICSH manages credit risk by investing in securities rated as investment grade by at least one of the three rating agencies, S&P, Fitch, and Moody's.
Fund Website
A security not rated by any of the three can still be included in the portfolio if it is determined to be of investment grade quality by the management. The ETF regulates its interest rate risk by having a portfolio of securities that collectively have a dollar-weighted average maturity less than 180 days.
The recent numbers indicate a slightly longer portfolio maturity (0.63 yrs) but it does not move the needle in terms of the interest rate risk. Additionally, while the portfolio level maturity is a factor, it is not a direct indicator of the interest rate risk. That would be the duration risk, which the June 9 numbers indicate is 0.46 years. Duration risk is the metric that reflects the sensitivity of the portfolio value (or individual securities) to changes in interest rate. A 0.46 years duration risk indicates the extent to which the portfolio value will fall with a 100 basis point rise in interest rates and vice versa. According to consensus, we have already reached peak rates for this cycle and the Federal Reserve will only ease from this point onwards.
Even if the Federal Reserve caters to the contrarians and surprises with a hike, there is limited room to hike and with the low duration risk, this is close to a non-issue for ICSH. Coming back to the portfolio characteristics for this ETF, we can see that the while the weighted average coupon is 4.31%, the prices they got for their holdings collectively get them a yield to maturity or YTM of 5.53%.
The 30-Day SEC Yield represents the net income earned by the fund in the 30 days preceding the calculation. This seems a bit low considering the annual expenses are 0.08%, however, this could be a function of interest rates rising in this period. We will stick to the YTM minus expenses, which comes to 5.45% as the current net income for ICSH. This brings us to what the fund is distributing to its investors, which we can see is generally on the rise in the last few months.
The most recent distribution and the current price get us to 4.43% in an annual yield for the unitholders. The outgoing distributions take time to catch up to the net earnings of the fund, and we expect to continue to see the rising trend in the monthly payouts over the next few months.
Comparatives
In the cash parking area, there are two funds, iShares Short Maturity Bond ETF ( NEAR ) and PIMCO Enhanced Short Maturity Active Exchange-Traded Fund ( MINT ) which come very close to what this fund tries to accomplish.
ICSH has done the best over the last 5 years, and that likely stems from its lowest fees out of the trio. NEAR charges 0.25% and MINT is at 0.36%. So in that Universe, we think ICSH wins out.
Verdict
With the type of securities that this ETF holds, investors can make a little bit more than the risk-free counterpart.
While ICSH is actively managed, it does benchmark its performance to the ICE BofA US 6-Month Treasury Bill Index. We can see it has been comfortably ahead of it for most of its existence. The interest rate risk, as discussed earlier in this piece, is too negligible to consider while making the decision whether to hold ICSH. Investors wanting to stay conservative, but not risk-free conservative, can consider adding a small amount of this tiny, well-modulated shot of adrenaline to their portfolio.
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.
For further details see:
ICSH: Cash Parking Pays Almost 5.5%