best place to park cash now

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.

My local credit union pays 1.4% on 2 year CDs, so there is no need to take on any interest rate risk.

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 to ING.

I just don't understand how MM can be 0.1% when Online Savings are at

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, margin, etc.).

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.

The longer you can tie up the money, the better the rate you can get now. But a savings account rate of 1% looks pretty good these days if you need your cash to be immediately available.

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.

-Tad

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 treasuries).

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 bloom later.

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 penalties imposed.

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.

-Tad

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 CD. I'm not affiliated with Everbank, except being a customer for many years. Their rates are very competitive.