Cash has poured into money market funds since the Federal Reserve began its rate hiking cycle. But now that the central bank seems close to a rate cut, financial advisors are trying to push their clients away from these funds that could soon see their yields slashed. Short-term debt has been a popular investment over the past few years, and money market funds are a top example. There is currently more than $6 trillion in money market funds, with nearly $2.5 trillion of that from retail investors, according to the Investment Company Institute . For perspective, there was roughly $4 trillion in total money market funds as of the fourth quarter of 2019, according to the St. Louis Fed . Money market funds hold very short-term debt, and many currently offer a yield above 5%. But their yields are closely tied to the Fed’s benchmark rate, and they won’t get the price benefit from falling interest rates like longer-term bonds could. “The money market landscape is really, in my opinion, something that’s making it hard for investors to make the right decision right now,” said Sam Huszczo, founder of SGH Wealth Management in the Detroit, Michigan, metro area. Huszczo said he has been using senior loan products, which have floating rate exposure, to capture short-term yield in recent years. But now that a Federal Reserve cut is growing more likely, Huszczo is shifting toward target date maturity bond funds â namely Invesco’s BulletShares ETFs. With interest rate cuts looming, it is better to move early than late, Huszczo said. “Instead of parsing between locking in 5.4 or 5.29, it’s like, both of those are really good, and all it takes is one economic event that you cannot predict for those to go away abruptly,” Huszczo said. The potential benefit of the target date bond funds is that they effectively “lock in” a rate for investors at the time they are bought. The funds buy and hold debt until it matures, which is different from many other exchange-traded funds. This keeps the funds’ time exposure roughly constant. “A bond fund can get crushed but at least with these defined maturity things it’s actually more like a standard fixed income instrument where, at the end of the day, you’re getting your principal and interest,” said Strategas ETF strategist Todd Sohn. Since the yield curve has begun to flatten out, shifting into intermediate-term bonds is not giving up too much income in the meantime. For example, the Invesco BulletShares 2029 Corporate Bond ETF (BSCT) has a 30-day SEC yield of 4.94%. BSCT YTD mountain This bond ETF yields almost 5%. Active management For investors who do not want to manage a bond strategy on their own, actively managed bond funds could make sense. Ken Brodkowitz, chief investment officer at Gries Financial Partners, said his firm has been shifting into strategic income funds to get a bit more duration. These are actively managed multisector bond funds that have flexibility to hunt for extra yield as rates fall. “When we looked at a bunch of them, we found ones that had the right duration profile for us â very short, two-years and under â that weren’t really going out the risk curve,” Brodkowitz said. Many firms offer strategic income mutual funds. One example is the Fidelity Strategic Income Fund (FADMX) , which has a four-star rating from Morningstar. Active bond ETFs are showing strong growth. The BlackRock Flexible Income ETF (BINC) has passed $3.5 billion in assets after a little more than a year on the market and is mostly focused on short- and medium-term debt. Brodkowitz did say that Gries Financial is not expecting dramatic cuts from the Fed and is still keeping short-term rate exposure in the form of the US Treasury 3-Month Bill ETF (TBIL) , which has a much lower expense ratio than many actively managed products. Cash on the sidelines? The trillions of dollars in money market funds have been described by some on Wall Street as “cash on the sidelines” that could fuel further gains for the stock market if activated. However, investors seem to be content to collect the yield, even if its returns trail the stock market. Strategas’ Sohn pointed out that money market fund assets consistently grew in the 1990s even as the dot-com era excitement took off. “Historically, you don’t tend to see money market inflows stop or convert to outflows until you get below say 3% on those rates. People are just happy with 4 and 5,” Sohn said. For younger investors, missing out by not being in the stock market could be a long-term mistake, said Callie Cox of Ritholtz Wealth Management. “I think this is one of the biggest mistakes investors are making right now, and over at Ritholtz we’re actively educating our clients about the change in the rate environment and the opportunity that you could be missing out on if you’re putting way too much money into cash,” Cox said. Huszczo said there seems to be a psychological barrier for some investors. The promise of short-term yield, with very little risk, overshadows opportunities for better long-term returns. “Opportunity cost is way easier pain to stomach for most people than actual losses,” Huszczo said.
Source Agencies
