By Investment Associate Bobby Adusumilli, CFA.
One of our roles as advisors is to look for opportunities to allow your money to work better for you. Cash is often one of the most overlooked assets when it comes to improving someone’s investment returns. People may have large amounts of cash for a variety of reasons: emergency fund, saving for a house down payment, planning to buy a new car, etc. We often see people accumulating cash in their checking account without really thinking about it. Particularly today, with short-term U.S. Treasury bonds paying upwards of 5% interest on an annualized basis, we view this as a missed opportunity to earn more interest.
There are many ways to potentially increase the amount of interest you receive on your cash savings while still investing in something that is low risk and readily transferable to your checking account within a few business days. While people commonly hold their cash within checking and savings accounts, we want to highlight three short-term, interest-bearing investments that can be held within your investment brokerage account:
Sources: Average Interest-Bearing Checking Account and Average Savings Account: "Bankers Resource Center: National Rates and Rate Caps". FDIC, 20-May-2024, fdic.gov. Schwab Value Advantage Money Fund (SWVXX): "Schwab Value Advantage Money Fund® - Investor Shares". Charles Schwab, 31-May- 2024, schwabassetmanagement.com. One-Month Treasury Bill: "Daily Treasury Par Yield Curve Rates". U.S. Department of the Treasury, 31-May-2024, treasury.gov. Dimensional Ultrashort Bond ETF: "DUSB: Ultrashort Fixed Income ETF". Dimensional Fund Advisors, 31-May-2024, dimensional.com. Yield will not necessarily equal realized returns. See Important Disclosure Information.
Money market fund: A mutual fund that continually invests in ultrashort-term (around one-month on average), high-quality bonds. Money market funds accrue interest daily (interest is typically paid monthly) and are not expected to fluctuate in price. As a mutual fund, they are subject to an expense ratio. A good proxy to determine how the interest rate of a money market fund may change over time is to take the interest of a one-month Treasury bill and subtract the expense ratio.
U.S. Treasuries: Treasury bills, notes, and bonds (Treasuries) are issued directly by the U.S. government for terms ranging from one month to thirty years, as detailed in the chart below. They are subject to federal income tax, but not state or local income tax. Treasury bonds are often cheaper to buy and hold than money market funds, though you have to decide what you want to do with the money when the Treasury matures. You can sell Treasuries before they mature, though the value does fluctuate if sold before maturity. You can buy Treasuries through most major investment brokerage platforms including Charles Schwab.
Ultrashort bond ETF: An ETF (exchange traded fund) that continually invests in ultrashort-term, investment-grade bonds. Ultrashort bond ETFs typically range in average maturity from three months to one year. Compared to a money market fund, ultrashort bond ETFs usually invest in slightly longer-term bonds and have more exposure to corporate bonds, though any additional risk is typically accompanied by higher expected interest. Many ultrashort bond ETFs have lower expense ratios than various money market funds. It is important to note that ultrashort bond ETFs will fluctuate in price to some degree.
With interest rates rising over the last few years, we have had a lot of conversations about cash with clients. If you would like to discuss ways you can earn more on your cash, please feel free to reach out to us.
Source: U.S. Department of the Treasury, as of June 30, 2024. See Important Disclosure Information.
Important Disclosure Information:
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Statements contained in this report that are not statements of historical fact are intended to be and are forward looking statements. Forward looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice.