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Written by: Richard D. Steinberg , CFA, Steinberg Global Asset Management
In today’s rising interest rate environment, managing your clients’ need for income can be challenging and extremely frustrating. Money market yields have been hovering at close to zero for a long time, and no matter what market analysts may predict, no one knows for certain when the situation will change. As a result, advisors have to work harder than ever to squeeze out some level (any level!) of yield. It’s one of the many perils of an ultra-low-yield environment but, luckily, it’s one that can be battled.
I confess that as a planning-based money manager, I take a consistently active approach to managing assets. But whether your approach is active or passive, it’s a fact that you need a wide variety of investment vehicles to address the needs of a diverse client base and the demands of a fast-changing market. Plus, with interest rates likely to rise over the next two years, you have your work cut out for you—especially if, like me, you have no interest in stretching for yields.
So what’s the answer? There’s no silver bullet, but one tool that I feel has added an important arrow to our quiver recently is an actively managed, ultra-short-duration ETF designed to provide income while maintaining low volatility of principal.
Why an ultra-short ETF?
If money market funds have been your fallback for short-term positions, there are a number of potential advantages that make an ultra-short ETF worth exploring. First, in general, ETFs offer a level of flexibility that can be vital when managing liquid (or near-liquid) assets. Second, because the bonds within an ETF automatically roll into higher rate bonds as each bond expires, an ETF can provide an extra cushion of protection against rising rates.
That isn’t to say that a low-duration ETF—or any ETF for that matter—is a silver-bullet solution. In our firm, it is just one tool among others that we use to manage cash within our portfolios.
Our approach is pretty straightforward: we bifurcate our traditional short-term bucket into two distinct sets of assets—“need it now” and “need it soon”—and then apply a strategy that meets the requirements of each. For the “need it now” bucket, we rely primarily on U.S. Treasury Money Mutual Funds to purchase short-term, low-risk securities. Since the “need it soon” bucket can assume a slightly higher level of risk, we divide those assets into three sub-buckets, placing one portion into an ultra-short-duration ETF, another portion into an ETF with a slightly longer duration, and the remainder into other short-term instruments that we manage in-house. By choosing an ETF with a favorable expense ratio that focuses primarily on corporate and investment grade credit rather than government credit, we’re able to keep costs low and add an additional layer of diversification. We think this results in a flexible investment approach with measurable risk that allows us to try to actively squeeze out available yield by regularly adjusting each bucket based on the dynamics of the market.
Even if your investment style is more passive, a low-duration ETF may be a smart option. It can be easy to fall into the trap of simply accepting a custodian’s money market rate of return. But as a fiduciary, it’s your responsibility to serve in the best interest of your clients. Unfortunately, many of the funds offered by the leading custodians have not adjusted to today’s unusual low fee environment. Rather than being complacent about that lack of yield, look at every option available and seek out solutions that can complement your existing portfolio to help you better manage your cash positions. By seeking out alternatives to standard money market funds, it’s possible you’ll uncover the additional income you’ve been longing for with a slightly higher level of risk.
Related: Liquid-Alternative Investing from an ETF Strategist Perspective
There’s no question that today’s market environment requires more than just simple reallocation. By rethinking how you approach your short-term portfolios, you may be able to squeeze out the yield that seems to be hiding from us all. And while there’s no single vehicle that can deliver a total solution to your fixed-income needs nor any guarantee as to projected return, if you’re seeking a place to hold some cash with just a bit more risk and the potential for greater yield, it may be time to consider adding an ultra-short income ETF into the mix. Not only may it help fill the gap between money market funds and short-term bonds by targeting fixed income securities, but it may also be the key to effectively balancing risk and return—even in a market where it seems there’s none to be found.
Looking for current income with a focus on risk management?
Leveraging the expertise of J.P. Morgan’s Global Liquidity business, JPMorgan Ultra-Short Income ETF (JPST) aims to deliver current income while managing risk. Discover an innovative, conservative solution to segment cash and help build stronger portfolios. Learn more about JPST here .
Richard D. Steinberg, CFA, is President/Chief Executive Officer, Chief Investment Officer, and Lead Portfolio Manager of the ETF and Fixed-Income Strategies at Steinberg Global Asset Management, Ltd. in Boca Raton, Florida.
Disclaimer: The opinions expressed herein are those of Steinberg Global Asset Management, Ltd. ("SGAM") and are subject to change without notice. This material is not financial advice or an offer to sell any product. SGAM reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs and there is no guarantee that their assessment of investments will be accurate. SGAM is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about SGAM including our investment strategies, fees and objectives can be found in our ADV Part 2, which is available upon request.