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Here’s an interesting scenario that’s played out this year. As of July 12, the S&P 500 is higher by 18.6% year-to-date and while that’s been to the benefit of many investors, data confirm that there’s still a staggering amount of “cash on the sidelines.”
Data released earlier this month by the Investment Company Institute indicate that a record $6.15 trillion is sitting in money market funds. As a fun anecdote, $6.15 trillion would be enough to buy Amazon (AMZN) three times over assuming no premium was involved.
That’s a staggering amount of cash to be sitting in “risk-free” cash when considering the S&P 500 is higher by more than 27% over the past year. Of course, advisors know that there is risk with cash in the form of the Federal Reserve cutting interest rates, which would result in lower yields on basic cash instruments. Fortunately, there are cash alternatives that aren’t as vulnerable to declining interest rates and those include the Alpha Architect 1-3 Box ETF (BOXX).
BOXX employs an options strategy known as the box spread to generate income, potentially serving as an attractive alternative to money markets. In a box spread, an options trader uses contracts that essentially eliminate each other’s risk while providing a buffer against volatility in the underlying security. The income generated is derived from the difference between the contracts’ strike prices.
BOXX Is Drawing a Crowd
BOXX debuted in December 2022 and when it was highlighted here in March, it had $1.6 billion in assets under management. That tally has since more than doubled to $3.6 billion, underscoring market participants’ affinity for unique cash alternatives.
Much of BOXX’s allure is derived from tax benefits. Investors that hold Treasurys are taxed on ordinary income generated by the interest on those bonds and are then subject to capital gains when the bonds are sold, assuming a profit was made. BOXX offers different tax implications.
“When you hold BOXX and it’s not paying out anything, your tax bill only really comes when you decide to sell the funds, and that’s getting taxed as capital gains,” notes Morningstar’s Lan Anh Tran. “If you hold the fund for longer than a year, that’s long-term capital gains. And so that is going to be lower than the ordinary income tax rate for most tax brackets. And that’s not an easy thing to do. Otherwise, more people would have done it.”
Additionally, ETFs in general are inherently tax-efficient vehicles, paving the way for BOXX to offer more tax benefits than a competing mutual fund.
BOXX Doing What It’s Supposed to Do
Advisors and experienced investors know that new ETFs of any stripe deserve scrutiny and it’s appropriate to ask if those funds and their older brethren are doing their jobs. In the case of BOXX, yes, the ETF is performing as expected.
“Returnwise, it’s been close to the 1-3-month Treasury bill return. Payoutwise, even as I mentioned that they previously used index option, which is more complicated, actually, since inception, they haven’t paid out any taxable distribution. No dividend, no capital gain, no return on capital, or anything since inception in December 2022,” adds Tran.
That’s good news and there’s always a case for keeping some cash on hand, which could signal that BOXX could be durable should interest rates decline.
Related: Some Vanguard ETFs May Be Overlooked