Even the most aggressive investors need to keep
cash on hand. But nowadays, it's hard to get any kind of return on
the money you have on the sidelines.
Ever alert to try to fill a need, the
has come up with some solutions that purport to give you better
alternatives for your cash. But as it turns out, they're all
inferior to standbys that have been around for years -- and that
will give you better returns with a whole lot less risk.
The rise of money ETFs
Traditionally, investors have gravitated to money market mutual
funds for their liquidity and convenience. With fairly low
expenses, many money market funds let you capture nearly all of the
income that prevailing interest rates provide. Under normal
circumstances, that's more than adequate for most investors'
prevailing interest rates are close to zero
right now. That has pushed the average yield on money market funds
all the way down to 0.02%. Since no one likes to earn a rate with
that many zeros in it, investors are hungry for better-paying
alternatives. In addition, some concerns about the type of
investments that money market funds make, some of which include
exposure to European banks
, have made investors nervous about keeping their money in
That's where money ETFs come in. These funds come in different
flavors. If you need the security and protection of Treasuries,
SPDR Barclays Capital 1-3 Month Treasury Bill
) closely mimics the duration of short-term Treasury bills. On the
other hand, the
iShares Barclays Short Treasury Bond Fund
) holds Treasury securities that have somewhat longer maturities,
thereby offering at least the prospect of better rates.
For those willing to take still more risk, the
Pimco Enhanced Short Maturity Strategy
) is an actively traded ETF that invests in a wider array of
short-term bonds, including investment-grade corporate debt. In
addition, the average maturity of the fund is roughly eight months
-- quite a bit longer than a standard money market fund.
Do they deliver?
The problem with money ETFs is that they don't overcome the problem
that money market funds have. Even with slim expense ratios of
0.13% to 0.15%, the Treasury money ETFs don't earn enough income
right now to get out of the red. The SPDR ETF has a year-to-date
return of -0.02%, while the iShares ETF has a current SEC yield of
The Pimco money ETF does a better job of coming out ahead. Even
after expenses, it sports an SEC yield of 0.90%. Yet although the
fund's returns on a net asset value basis are strong, the actual
market price returns that shareholders have earned amounted to
-0.07% for the first half of the year. Moreover, when you combine
the slight duration risk that comes from owning longer-maturity
debt with the minimal but present default risk of corporates,
you've already come a long way from most money market funds.
Finally, with any ETF, you have to consider not only the
expenses associated with holding the fund but also the
you have to pay to buy or sell the funds. Those used to dealing
with money market funds may never have had to deal with those
trading costs before, but unless you have a lot of cash, even
modest trading fees can eat into whatever income you can find.
The easier choice
If you need to hold cash, the better option is an old standby: the
bank savings or money market account. Believe it or not, many banks
pay better rates on plain vanilla FDIC-insured accounts than you
can get from these new-fangled ETFs. In particular, the banking
) both pay more than 1% on certain savings and money market account
products, while Ally Bank and
(AIG) come in just short of the 1% mark.
Of course, these rates may not last forever.
(ALL) recently announced it would voluntarily close its Internet
banking division. With rates so low, others might well follow
But as long as ultra-safe insured choices give you such an easy
way to keep your cash as productive as possible, there's no good
reason to resort to complicated alternatives. Cash ETFs may be an
interesting innovation, but at least for now, they don't offer the
returns you deserve -- or that you can get elsewhere.
Meanwhile, getting more income isn't just about where you stash
your cash. For more income from the stock portion of your
portfolio, you'll find 13 promising dividend stocks in this free
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relies on his credit union for his cash management. You can
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. He doesn't own shares of the companies mentioned in this
article. The Motley Fool owns shares of AIG.
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