(Barron's) - Is cash no longer trash? After years of yielding next to nothing, short-term bond investments are suddenly delivering yields large enough to detect with the naked eye. That doesn’t mean beleaguered investors should trade stocks for cash equivalents. But it’s good news for people who need a safe, liquid place to temporarily stash their cash.
For this week’s Big Q, we asked financial advisors: Now that interest rates are rising, where are the best places for clients to park their cash?
Stephan Cassaday, chairman and CEO, Cassaday & Co.: If people insist on having a larger cash balance than we’d recommend, we’re doing a laddered Treasury setup, where you buy five different maturities. As of today, you’re looking at 30-day yields of 66 [basis points], and then eight weeks is 91, 106 for 13 weeks and 150 for six months, and then a full year is 211. Average that out, it’s close to 1.5%. And Treasuries are state-tax free, so people in high-tax states really get a boost from that.
So that’s what we’re recommending for people who just want to have some cash. If you need constant daily liquidity, money market funds are probably always going to be a good choice. Vanguard has several that are attractive. We think that with rates so low, funds with low fees are the places [clients] should go. And then you can mix it up. For example, we have a client who has proceeds from selling a house, but the house he’s buying is not ready. So we just bought him a one-year Treasury, and he’s getting a yield over 2%, which is really good.
Hugh Nickola, head of fixed income, GenTrust: We tend to focus on ETFs for these types of investments because they give you diversification and liquidity, right out of the gate. We focus on ETFs that have very low fees. One area is the ultra-safe government ETFs, like VGSH (Vanguard Short-Term Treasury Index Fund). We also look at corporates. One that we lean on quite a bit for short-term investments is VCSH [Vanguard Short-Term Corporate Bond ETF]. Its duration is close to three years, but it yields a little bit more. We use SPSB [ SPDR Portfolio Short Term Corporate Bond ETF ] as well.
Tax exempt bonds are interesting right now. Tax-exempts have cheapened up dramatically relative to corporates and Treasuries, they’re at the cheapest level we’ve seen in some time. Our clients are typically in the highest tax bracket, so they do benefit significantly from tax-exempts.
My concern is that if we continue to see a slowdown develop, the opportunity to actually invest at these interest rates might be reasonably short lived. But we’ll see.
Brenda O’Connor Juanas, financial advisor, UBS: We’re still maniacally focused on avoiding wealth erosion through inflation. Even though cash is more attractive than it was six months ago, on an after-inflation basis, there’s a good argument that it’s a losing proposition. When I think about ways to hedge and protect and allocate cash right now, considering interest rates, inflation and market volatility, alternatives are a really big focus for my team this year. Specifically, we’re looking at private credit and private real estate. These are uncorrelated to equities and they’re yield-generating. Some of the best private credit managers are going to be delivering 7% to 10% net returns to clients.
That being said, if you’re sitting on cash right now, I would start selectively looking at equities. From a risk-reward basis, if you’re a long-term investor, the markets are starting to get a little bit attractive. I would be looking at things like dividend-focused U.S. equities; we think these will perform well amid rising rates and high inflation. And even start to look at some high-quality tech. We think a lot of this rerating might be priced in at this point.
Tom Graff, head of investments, Facet Wealth: For the first time in close to three years, we’ve had[respectable] interest rates on money markets and other cash-like instruments. And this is coming on the heels of the broad bond market having its worst start to a year pretty much ever. Clients are looking at their safety net being the bond portion of portfolios, and wondering what happened.
Unless the client has almost immediate cash needs and is really just looking for a very safe part of the portfolio, I would go with something that’s got a little bit of duration and yield to it. Right now the two-year Treasury yields almost 2.6%, whereas money-market yields are still in the 20- or 30-basis-point area. So if you have a little bit of a horizon and can handle slight day-to-day variance, there’s a lot more income generation to be had.
If you’re saving for a house in two or three years, and don’t want to put your cash at huge market risk, then you can get away with a short-term corporate bond fund or something along that line. It’s really important to match the time horizon of when you might need cash with the type of instrument you use, the variance in there, and how tolerant you can be of any kind of loss.
Katy Jochum, financial advisor, Wells Fargo Advisors: If you have to put away cash in this environment, you’re assuming that we’re going to benefit from the rising interest rates. But the banks are out to make money too, so to assume that the retail client is going to see 100% of an increase in rates is optimistic. But there are some niche markets. There are credit card companies and other online banks that run more streamlined businesses and so are able to pass along those increased deposit rates to the customer in a more efficient way.
So it’s not just about looking at money markets with a traditional bank, but shopping around and trying to find something that pays a little bit better and that is variable and can capture rates as they continue to rise. Just like anything else, if you want to make money and you want to optimize your portfolio, you do have to work for it. Shop around, compare rates. There are even a lot of sites that will do it for you. The return you’ll get is a function of the time that you’re willing to commit.
By Steve Garmhausen
