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Rising rate worries are gripping the whole world, crippling the investing scenario again with uncertainty. Volatility may become the name of the game thanks to a host of factors ranging from rising inflation in the United States and other parts of the developed world, fears of a slowdown in China and the resultant pressure on supply chain and global growth, and geopolitical issues.
Wall Street was off to the worst start to a year in 2022 since 1939. And analysts believe that more crashes are in the cards. As rising rate worries have been prevalent with the Fed hiking rates faster this year, the bond investing is also at worse. This is because, bond prices share an inverse relationship with bond yields.
Hence, cash is emerging as a popular asset with Wall Street’s top managers. Rick Rieder, managing director at BlackRock Inc., said the world’s largest asset manager is raising cash holdings by more than 50% in many portfolios to a weighting that is “much, much higher” than it had been in years past, as quoted on Wall Street Journal. With central banks striving to lower inflation by raising interest rates across the world, he expects stock prices to remain volatile for the next two to six months.
Why Hoarding Cash Makes Sense Now
Investors sold their possessions to retain money in the wake of the heightened uncertainty caused by a market crash. The road ahead is a bit unclear. Hence, we believe cash and short-dated fixed income may play a greater role in adding stability to a portfolio. This is especially true given that the Fed will keep on hiking rates this year and short-term bond yields will rise alongside.
Bank of America is expecting the Federal Reserve to raise U.S. interest rates to 3% by early next year from their current level of 0.75% to 1.0%, the WSJ article noted. That would result in a similar rate for cash-like assets such as money-market funds.
Per the WSJ article, Bank of America’s April survey of global asset managers showed that cash holdings are near the highest level since April 2020 — the period representing the aftershock of the COVID-driven market selloff. The article pointed out that State Street Global Advisors also said portfolios at the firm are holding at least 50% more cash from the beginning of the year.
Below we highlight a few money-market ETFs and their performance plus yields.
The JPMorgan Ultra-Short Income ETF seeks to achieve its investment objective by primarily investing in investment grade, U.S. dollar denominated short-term fixed, variable and floating rate debt. The fund charges 18 bps in fees and yields 0.69% annually.
Columbia MultiSector Municipal Income ETF (MUST - Free Report) – Yields 1.67% annually
The Beta Advantage Multi-Sector Municipal Bond Index reflects a rules-based, multi-sector strategic beta approach to measuring the performance of the U.S tax exempt bond market, which is composed of bonds issued by or on behalf of state or local governments whose interest is exempt from regular federal income tax, with a focus on yield, quality, maturity, liquidity, and interest rate. The 30-day SEC yield of the 605-securities ETF MUST is 2.76% annually.
The First Trust Low Duration Strategic Focus ETF seeks to achieve its investment objectives by investing at least 80% of its net assets (including investment borrowings) in a portfolio of U.S.-listed exchange-traded funds that principally invest in income-generating securities that provide the Fund with an effective portfolio duration of three years or less. First Trust Low Duration Opportunities ETF takes 40.61% of the fund while iShares 0-5 Year Investment Grade Corporate Bond ETF takes 20% share.
iShares IBonds 2022 Term High Yield And Income ETF – Yields 1.88% annually
The underlying Bloomberg 2022 Term High Yield and Income Index comprises of U.S. dollar-denominated, high yield and other income generating corporate bonds maturing in 2022. The fund charges 35 bps in fees.
iShares iBonds 2023 Term High Yield and Income ETF – YTM 5.06%
The fund gives exposure to a diversified universe of high yield and BBB-rated corporate bonds maturing between Jan 1, 2023 and Dec 15, 2023 in a single fund. The weighted average maturity of the fund is 1.07 years, while the effective duration is 1.05 years. Option adjusted spread as of May 5, 2022 is 315.13 bps meaning that the fund has earned this much of incremental yield over similar-duration U.S. treasuries.
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Does Value Lie in Cash-Like ETFs Right Now?
Rising rate worries are gripping the whole world, crippling the investing scenario again with uncertainty. Volatility may become the name of the game thanks to a host of factors ranging from rising inflation in the United States and other parts of the developed world, fears of a slowdown in China and the resultant pressure on supply chain and global growth, and geopolitical issues.
Wall Street was off to the worst start to a year in 2022 since 1939. And analysts believe that more crashes are in the cards. As rising rate worries have been prevalent with the Fed hiking rates faster this year, the bond investing is also at worse. This is because, bond prices share an inverse relationship with bond yields.
Hence, cash is emerging as a popular asset with Wall Street’s top managers. Rick Rieder, managing director at BlackRock Inc., said the world’s largest asset manager is raising cash holdings by more than 50% in many portfolios to a weighting that is “much, much higher” than it had been in years past, as quoted on Wall Street Journal. With central banks striving to lower inflation by raising interest rates across the world, he expects stock prices to remain volatile for the next two to six months.
Why Hoarding Cash Makes Sense Now
Investors sold their possessions to retain money in the wake of the heightened uncertainty caused by a market crash. The road ahead is a bit unclear. Hence, we believe cash and short-dated fixed income may play a greater role in adding stability to a portfolio. This is especially true given that the Fed will keep on hiking rates this year and short-term bond yields will rise alongside.
Bank of America is expecting the Federal Reserve to raise U.S. interest rates to 3% by early next year from their current level of 0.75% to 1.0%, the WSJ article noted. That would result in a similar rate for cash-like assets such as money-market funds.
Per the WSJ article, Bank of America’s April survey of global asset managers showed that cash holdings are near the highest level since April 2020 — the period representing the aftershock of the COVID-driven market selloff. The article pointed out that State Street Global Advisors also said portfolios at the firm are holding at least 50% more cash from the beginning of the year.
Below we highlight a few money-market ETFs and their performance plus yields.
ETFs in Focus
JPMorgan UltraShort Income ETF (JPST - Free Report) – Yields 0.69% annually
The JPMorgan Ultra-Short Income ETF seeks to achieve its investment objective by primarily investing in investment grade, U.S. dollar denominated short-term fixed, variable and floating rate debt. The fund charges 18 bps in fees and yields 0.69% annually.
Columbia MultiSector Municipal Income ETF (MUST - Free Report) – Yields 1.67% annually
The Beta Advantage Multi-Sector Municipal Bond Index reflects a rules-based, multi-sector strategic beta approach to measuring the performance of the U.S tax exempt bond market, which is composed of bonds issued by or on behalf of state or local governments whose interest is exempt from regular federal income tax, with a focus on yield, quality, maturity, liquidity, and interest rate. The 30-day SEC yield of the 605-securities ETF MUST is 2.76% annually.
First Trust Low Duration Strategic Focus ETF (LDSF - Free Report) – Yields 2.48% annually
The First Trust Low Duration Strategic Focus ETF seeks to achieve its investment objectives by investing at least 80% of its net assets (including investment borrowings) in a portfolio of U.S.-listed exchange-traded funds that principally invest in income-generating securities that provide the Fund with an effective portfolio duration of three years or less. First Trust Low Duration Opportunities ETF takes 40.61% of the fund while iShares 0-5 Year Investment Grade Corporate Bond ETF takes 20% share.
iShares IBonds 2022 Term High Yield And Income ETF – Yields 1.88% annually
The underlying Bloomberg 2022 Term High Yield and Income Index comprises of U.S. dollar-denominated, high yield and other income generating corporate bonds maturing in 2022. The fund charges 35 bps in fees.
iShares iBonds 2023 Term High Yield and Income ETF – YTM 5.06%
The fund gives exposure to a diversified universe of high yield and BBB-rated corporate bonds maturing between Jan 1, 2023 and Dec 15, 2023 in a single fund. The weighted average maturity of the fund is 1.07 years, while the effective duration is 1.05 years. Option adjusted spread as of May 5, 2022 is 315.13 bps meaning that the fund has earned this much of incremental yield over similar-duration U.S. treasuries.