Money Markets Are Acting Like A Recession Is Coming by Michael A. Gayed, CFA

in syndication •  3 years ago 

Summary:

  • It’s not a surprise given headlines out there that a lot of cash has rushed into the money markets and “sits on the sidelines.”.
  • The fund flow pattern is starting to look a lot like the ones before the last 2 recessions.
  • Although all investments pose some risks, these are some relatively safe money market ETFs.
  • Looking for a helping hand in the market? Members of The Lead-Lag Report get exclusive ideas and guidance to navigate any climate. Get started today »

"Safety is something that happens between your ears, not something you hold in your hands.” – Jeff Cooper

Money markets have attracted everyone’s attention this week, again. The U.S. Federal Reserve injected billions of dollars into the financial system since Monday. The surge in borrowing costs was due to the temporary shortage of cash caused by quarterly corporate tax payments and the settlement of $78 billion in supply of Treasuries sold last week.

It’s not a surprise given headlines out there that a lot of cash has rushed into the money markets and “sits on the sidelines.” The fund flow pattern is starting to look a lot like the ones before the last 2 recessions.

Money market assets are a necessary part of many investors' portfolios because they provide safety and preservation of capital in an uncertain and turbulent market. These funds generally invest in very liquid and high quality short-term debt instruments such as commercial paper and U.S. Treasury bonds, which don't usually provide significant income. While money markets ETFs invest the majority of their assets in cash equivalents or highly-rated and very liquid securities, some may invest a portion of their funds in lower-rated or longer-term securities. These securities present higher risks.

Although all investments pose some risks, these are some relatively safe money market ETFs.

iShares Short Treasury Bond ETF (SHV) invests in the shortest end of the yield curve by focusing on U.S. Treasury bonds that have less than one year in maturity. The ETF takes very little interest rate risk or credit risk and, therefore delivered an average annual return rate of 0.99% since inception. However, it's a conservative fund to park your assets during volatile markets. The 1-year return is 2.35%, 3-year return is 1.28%, and 5-year return of 0.82%, with a trailing 12 months dividend rate of 2.22%.

The fund has 43 holdings, with about 68% of its $23.6 billion net assets in U.S. Treasury securities and the remaining in cash and/or derivatives. All of the fund's treasuries investments have the highest bond rating of AAA. The ETF has a low expense ratio of 0.15%.

iShares Short Maturity Bond ETF(NEAR) seeks to maximize current income by investing 80% of its assets in investment-grade, fixed-income securities with an average duration that is generally less than one year. The fund is actively managed, which means it does not attempt to replicate the performance of a specific index. The 1-year return is 3.02%, 3-year return is 2.10%, and 5-year return of 1.63%, with a trailing 12 months dividend rate of 2.65%.

...Read the Full Article On Michael A. Gayed's Blog on Seeking Alpha

Author Bio:

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This article was written by Michael A. Gayed. An author on Seeking Alpha and founder of the Lead Lag Report.

Steem Account: @leadlagreport
Twitter Account: leadlagreport

Learn more about Michael A. Gayed on Seeking Alpha

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