I have Vanguard and Fidelity accounts, and it looks like the money
markets yields are pitiful around 0.1% yield. I see that Vanguard has
a Limited Term Bonds fund yielding 1.4%, with average durations of 2
years. But with interest rates only having room to go up, again, am I
just better off putting the cash in a high yield savings (such as ING
with 1.0% interest)?
If we knew what rates would be over the next few years we could answer
you. Failing that, all you are going to get is guesses.
My guess is that rates will strengthen somewhat, meaning I would go
with cash (MM, savings, etc.) Assuming I am completely clueless
(another good guess) my worse case scenario is that I'm out 1% gross.
But my principal is still in tact.
Yeah, I'm not trying to gamble and guess the future, just trying to
put cash in the highest yielding place for the same amount of risk
(which in my case is near-zero risk). I'll probably move the cash out
I just don't understand how MM can be 0.1% when Online Savings are at
1.0%. I think Online Savings has less risk than MM.
Institutional money wants T-Bills and other huge-volume securities.
The savings account is too small and involves a time commitment
(institutions hate that word, 'commitment')..
I'd love to change this topic into a discussion about why short
interest rates are so low, for so long, while consumer interest is so
comparatively high (e.g. mortgages at 5%, credit cards at anywhere
from what(?) 8%-24%, personal loans probably in that same ballpark,
Maybe because the higher interest is associated with borrowers with
perceived unprecedented risk of not paying back, not only due to
inability but populist law changes or willingness for jingle-mail,
etc. Legislation has been hard on banks and employers, so this may not
rebound for a while.
I would flip the question the other way, and ask why not be on the
beneficiary end of this distortion. Is the quest for nearly riskless
savings sensible when the value of a dollar is elastic anyway due to
exposure to inflation and exchange rates? Why not seek higher yield of
bank loan fund FFRHX or high yield FHIFX, which admittedly recently
had a -20% black swan moment but normally would rarely lose more value
than interest it paid.
I posted my usual eccentric brainstorm proposal, but thought I would
post the way I actually implemented it just now. This thread reminded
me I had parked some money as brokerage cash out of frustration with
poor traditional returns. But more interesting things are possible due
to my realization that I needn't make a fetish out of the desire to
never lose even 1 percent of it.
My idea was to split the cash among several 2 - 6.5% yielding funds
whose risk factors were somewhat noncorrelated, so as to not likely
fall together in equity price. I already had some mutual bond funds
but I didn't trust the custodian to handle tax basis properly if I
made new incremental purchases and withdrawals (some of the ancient
basis info could create a fifo hiccup). Also using mutual funds could
trigger early withdrawal fees, although rather moderate.
Then I remembered the commission free bond etfs, which unlike mutual
funds can be liquidated in seconds. I graphed all of the free ones
overlaid to look for uncorrelated or inverse correlated ones,
especially through periods of rising interest rates which we may face
next. Also considered the way yield can sooth the dips.
The search for uncorrelated pairs, etc was not successful given our
uniquely tricky bond outlook and the few etf bond offerings. I decided
on one 5.5% yielding etf and the other half still sitting in cash.
I am very familiar with the rather weird risk profile of the etf and
expect it's yield to be either cancelled out or more likely matched by
capital gains/losses. The overall total return should range from zero
to 5% once you consider the dead cash (tiny returns cancelled out by
the tiny SEC surcharge on etf trades) and the yield plus capital gain
of the etf. Some risk of greater loss or gain, but more likely 3% ish.
I'm curious, what was the discount/premium to NAV for the ETF, based on
your trade price? And how wide is the trading spread currently?
There's a lot of variation among bond ETFs but sometimes the "slop" from
those factors can be on the order of that yield you're quoting.
This discount/premium was higher than expected, 0.57%. My rejected
second choice etf was only .02% (all monthly average). Don't those
mostly cancel out on buy/sale? Not sure how it works, but I do think I
would tend to be on losing side due to being somewhat of a momentum
trader (my chosen bond etf just reeked of upward momentum with a
reversion-to-mean looking share price chart).
The spread (monthly and actual) was .06 on over $100 share price which
seems miniscule, especially since the effective spread in my buy vs
future sale may be more like 4 or 5 cents. This broker seems to
negotiate me nicely within the spread on market trades, and for the
first time I didn't even check my results on the price I got due to
long experience (and bad experience setting limit orders due to being
a momentum follower). So that is only 0.06% or less lost vs 5+% yield
if held for a year. Actually, I expect my cash half to be drawn down
before a year, but the etf half will likely park for longer.
Maybe I have this wrong, but the free bond etfs seem to have quite
efficient and liquid markets where these factors would only matter a
lot for quite short term parking. I think even their stock etfs may be
unusually mainstream and moderate in spreads and so on.
You did say you were at Fidelity, right?
The NTF Bond ETFs there are these six iShares ones:
Sym Index SEC Curr WAC Dur. bd/ak Assets
Yld Yld sprd
AGG - BarCap Aggregate 2.65 3.47 4.75 4.57 0.96% $10.8B
TIP - BarCap TIPS 5.49 2.68 2.08 5.43* 0.51% $19.8B
LQD - iBoxx $ Inv. Grd. Corp 4.25 4.85 5.85 7.12 0.13% $12.8B
HYG - iBoxx High Yld Corp 6.36 8.00 8.50 4.00 0.12% $ 8.6B
EMB - JPM USD Emerging Mkts 4.89 5.14 7.00 6.93 0.16% $ 2.4B
MUB - S&P Nat'l AMT-Free Muni 3.47 3.75 5.11 7.55 1.26% $ 2.0B
(SEC Yields from the iShares site, rest from Morningstar)
I wouldn't call *any* of these low-risk alternatives for short-term
parking or cash alternatives. Look at those durations - if/when
interest rates go up, these are almost all likely to get killed.
They may be reasonable long-term holdings but even then, I'd be
wary of the treasury-heavy ones (ie. AGG), and TIPS, while they
are not necessarily going to get killed by rates going up the
same way, as they'll adjust for inflation, note that the "real
rate" one locks in today is awfully low - the current 10yr "real
rate" locked in by a 10yr TIPs bond is 0.99% (above inflation).
If that real rate rises, even if the inflation adjuster helps,
that real rate rise can seriously hurt these things.
There are some decent shorter term alternatives, but not "free"
over at Fidelity. And free or not, there are a couple of those
above that have alternatives worth looking at (ie. instead of
AGG, consider BND - same index, but Vanguard's take on it).
Short term bond ETFs (I don't have time for details like
above right now):
BSV - Vanguard Short Term Bond Index (tracks BarCap 1-5 Gov/Cred)
VCSH - Vanguard short-term corp bond ETF
CSJ - iShares BarCap 1-3 credit bond etf
(There are govt and treasury versions of these latter, two, but
I don't think they are great to look at right now)
Also, iShares has a short-term muni bond ETF, symbol SUB,
with about $400M, SEC yield of 0.94%, dur of only 2yrs.
That VCSH is something to keep an eye on, especially in
IRAs (or folks with low marginal tax rates). It's already
got $1.39B, the SEC yield is over 2%, expenses are, well,
vanguard-like, and duration is 2.8yrs. (BSV's dur is
about the same, but the yld is held down badly by the
Sounds like you agree with me rejecting most of them at this
particular time. I knew my actual choice would be controversial, so
emphasized my process rather than the bottom line choice. I think my
intention of getting an assortment whose higher risks were mellowed
out en mass due to diversified risk patterns would normally pay off.
As it is, my weak diversification of half cash may still work well
because it is the only portion that I expect to draw down on vs maybe
never on the bond etf half. One could do similarly with a grab bag of
uncorrelated bond funds, where partial withdrawals could target the
particular etf that is ripening the most, and leave the weak ones to
Re rising interest rates: emb WAS a special case where it had POSITIVE
correlation with interest rates because emerging yield was so huge
that like junk bonds it's value varied with default risk instead. Now
it's risk level has gone down enough and yield lowered so that (groan)
in the last 20 months it has picked up gently NEGATIVE correlation to
US 10 year rates.
I was a little reckless this time because I have started to always
have investments displayed nearby on a little wifi tablet, whose
colorful animated display will alert me to any share price weakness
within seconds. I'm not married to any investment, and if smelling a
persistent trend I can now go on to greener pastures immediately. EMB
in particular is something I have wanted to be except in it's few
mopey periods. It's mutual fund companion FNMIX has had unbelievable
long term results... tripling in the last 10 years when sp500 barely
moved, and doing even better in the past where it gave 12+% annual
total returns spanning the last couple decades.
Those have pretty good (although short) records except perhaps SUB.
Share price has sagged against it's thin 2% yield, and wouldn't look
too well if you furthermore made several commission eating
withdrawals. But maybe OK if you understand which horse to ride, like
VCSH which has been looking good.
The banks are the ones who represent risk, and gamble on probabilities
and pumping markets: - and the banks failed, dragging the financial
system into the cesspool they had created. Is everybody here caught up
in a Stockholm Syndrome? The legislation is a wimpy joke. So are the
The life of a society depends upon its morality which in turn depends
upon the morality of each individual. I'm not talking Puritan
opposition to fun either; I mean refusing to engage in fraud and
forming an honest assessment of values.
If it was +0.57% you may have overpaid vs. an analogous open-ended
mutual fund, if it was -0.57% you got a bargain (and the
discount/premium that matters is the one at the moment you traded, not
the recent average which might be completely different). Though as you
mentioned there's the issue of a short-term trading fee for some
traditional open-ended mutual funds.
Whether it works for or against you depends of course on the
discount/premium when it's time to sell. My observation is that ETFs
(just like closed-end funds) are more likely to trade at premiums when
the asset class of the ETF is in favor, and more likely to be at a
discount when people are heading for the door. It isn't universal and
most likely to be there only during extremes in either direction. To the
extent this is a real effect (debatable), a momentum trader would be on
the wrong side of this - because momentum traders buy into rising
markets and sell into falling ones.
If you're interested, Andrei Shleifer's "Inefficient Markets" has an
chapter on "The Closed End Fund Puzzle" that is relevant to ETF
discounts/premiums. There's more to the story and issues like stale
pricing (used in NAV calculation) might be a factor.
Most stocks are easier to trade than most bonds and even some of the big
bond ETFs have had noticeable discounts or premiums. An ETF arbitrage
trader or ETF-unit creator can probably trade large quantities of
large-cap stocks without moving the price. Trading corporate bonds,
munis, junk bonds, some stocks can by nature involve more transaction
costs, which means the price can drift farther from NAV before
corrective trading takes over.
I thought I was supporting morality. I was referring to populist
legislation or rule making that supports amoral consumers, and how the
banks have to charge more to everyone to cover the expense. Like new
cc rules or meddling with foreclosures. Jingle-mail seems obscene when
they are returning a housekey to the bank to stick them with the
underwater amount, even if they have ability to live up to their
payment obligations. You probably refer to (important) laws I haven't
kept track of.
If you want safety of principle with the benefit of the upside, you
may want to
consider something like Everbank's MarketSafe Diversified Commodities
I'm not affiliated with Everbank, except being a customer for many
Their rates are very competitive.