2023-05-17 15:00:43 ET
Summary
- With money market yields near 5% and short-term T-Bills above 5%, taking credit risk is not the best play.
- I would look to buy JPST if credit spreads widened, offering a risk premium.
- While the fund is very low cost and liquid, it's not the right time to own it, but not an outright sell.
It has been more than 15 years since investors have had so many options when it comes to investing their cash. Keeping a 3-6 month emergency fund used to be a significant drag on long-term returns, but today's yields of 5% or more offer a significant incentive to side-step market volatility in a basic short-term bond fund, money market account, or high-yield online savings vehicle.
In 18 months, though, money markets and savings accounts could yield a full two percentage points lower compared to today if the futures market's expectations are correct.
Short-Term Rates Forecast To Fall
CME Group
I have written a series on " stashing cash ," and today, I'm analyzing a popular short-term corporate bond ETF that has taken in significant assets over the past few years. It could be a particularly attractive fund for investors willing to take a modest amount of both credit and duration risk.
According to the issuer , the JPMorgan Ultra-Short Income ETF (JPST) is a 4-star Silver-rated ultrashort bond fund. It features a low 0.18% annual expense ratio . As with any bond portfolio, you will want to look to the ETF's latest yield to maturity (YTM) net of fees.
In this case, JPST sports a net yield of 5.39%. The duration - a measure of how sensitive a fixed-income product is to changes in market interest rates - is 0.84 years as of March 31. That means that for every 1% increase in yields, JPST will lose 0.84% of its net asset value, all else equal. So, the interest-rate risk is exceptionally low.
How JPST Can Fit Into Your Allocation
JPST invests primarily in a diversified portfolio of short-term, investment grade fixed- and floating-rate corporate and structured debt while actively managing credit and duration exposure, per JPMorgan. It is a top quintile return fund with top decile risk-adjusted returns since inception.
With a more than 6-year track record, JPST has an impressive $24.9 billion in AUM . In terms of tradeability, the ETF has a very low two basis point bid/ask spread on average while the current premium to NAV is a low 3 basis points. Volume averages more than 3 million shares daily, so it is a very liquid product.
Digging into the portfolio, JPST features a modest average maturity of its holdings while the credit risk is actually in the mid-section of Morningstar's bond style box. The fund may also hold significant cash and cash equivalents. Among the credit issues, the high majority has a maturity of less than a year with a weighted-average coupon of 3.82%.
JPST: Portfolio X-Ray
Fully one-third of JPST is high-grade corporates, with one-fifth in cash. The portfolio consists of more than 500 holdings, and dividends are paid monthly. Few bonds are callable, it appears - the yield to worst is awfully close to the YTM. Also note that nearly 20% of the ETF is held in commercial paper.
JPST's Portfolio Characteristics
Performance-wise, the fund did fall from a total return basis from late 2021 through early 2022 when rates rose dramatically. Also, the NAV dipped during the March 2020 COVID crisis - that is the key risk should the market experience a macro shock. The question each investor must ask themselves is, "Am I willing to take some credit risk to capture a scant more yield today?"
JPST's Total Return History
JPMorgan
The Bottom Line
I am a hold on JPST today. I would rather own a short-term Treasury ETF or simply park cash in a 5% money market. What's more, risk-averse investors can capture more than 4% yields in CDs up to 5 years in maturity.
The situation could change should rates fall dramatically over the next several quarters, or if yield spreads widen enough to offer a higher risk premium.
For further details see:
Stashing Cash: JPST's 5.38% Net YTM Not Worth The Risk Today