Do you hold US dollars (USD)? The greenback has risen sharply against major currencies like the euro and British pound in recent months.
As the Federal Reserve prepares to hike interest rates further in order to tame inflation, the USD is poised to continue appreciating in the months ahead. Now might be the time to deploy your USD funds into cash-like ETFs given their relative stability and higher yields.
Why has the dollar been so strong? Can it continue?
The dollar has rallied this year largely due to two reasons. First, the Fed has been raising interest rates more aggressively than other central banks, and markets have priced that in relative to other currencies.
Second, the dollar is traditionally seen as a safe haven asset. Given recession concerns and stock market volatility, investors have been flocking to the greenback – selling off other currencies in the process. This pushes up the value of the dollar while weakening other currencies.
Foreign exchange strategists predict the dollar to remain strong for longer, supported by higher US interest rates and the dollar’s safe haven appeal.
Cash-like ETFs for your USD funds
Wondering where to park your USD in the current environment? Cash-like ETFs could be an option.
These are funds that hold very short-term bonds and US Treasuries. Such ultra-short bonds typically have maturities of one year or less, making them less exposed to interest rate risk than longer duration funds.
Amid the current market uncertainty, cash-like ETFs can provide stability and higher yields on your USD funds.
Because the maturities are so short, proceeds from bonds that have matured get reinvested relatively quickly into higher-yielding bonds. As interest rates continue to rise, the yields on these ultra-short ETFs will likewise climb.
ETFs to consider
Here are some examples of ultra-short ETFs that you can use to manage your USD cash holdings.
- iShares Short Treasury Bond ETF (NASDAQ: SHV)
- SPDR Bloomberg 1-3 Month T-Bill ETF (NYSEARCA: BIL)
- JPMorgan Ultra-Short Income ETF (NYSEARCA: JPST)
At a glance
| SHV | BIL | JPST | |
|---|---|---|---|
| Yield to maturity | 5.42% | 5.40% | 5.83% |
| Size (AUM) | $20.4B | $30B | $22.8B |
| Expense ratio | 0.16% | 0.14% | 0.18% |
| Duration | 0.28 years | 0.07 years | 0.63 years |
| YTD return | 3.28% | 3.11% | 3.05% |
| Dividend frequency | Monthly | Monthly | Monthly |
Size (AUM) for SHV, BIL and JPST as of 12 Sep 2023
Duration for SHV, BIL and JPST as of 11 Sep 2023
YTD return for SHV as of 11 Sep 2023, as of 31 Aug 2023 for BIL, as of 12 Aug 2023 for JPST
Source: Respective fund websites
iShares Short Treasury Bond ETF (NASDAQ: SHV)
This ETF provides exposure to US Treasury bonds that mature in less than one year. It has an average duration of 0.28 years (about four months).
SHV has taken in more than $20 billion so far as investors flock to the fund amid volatile markets.
The fund tracks the ICE Short US Treasury Securities Index and carries an expense ratio of 0.16%. Dividends are paid monthly.
SPDR Bloomberg 1-3 Month T-Bill ETF (NYSEARCA: BIL)
BIL tracks the Bloomberg 1-3 Month U.S. Treasury Bill Index and holds zero coupon US Treasury securities that have a remaining maturity of 1-3 months.
Underscoring the popularity of ultra-short ETFs, BIL has attracted more than $30 billion in assets under management.
The ETF has an expense ratio of 0.14% and pays out monthly dividends.
JPMorgan Ultra-Short Income ETF (NYSEARCA: JPST)
JPST invests mainly in investment grade fixed-and floating rate bonds. Like SHV, the portfolio targets a duration of less than one year. As of 11 September 2023, the duration was 0.63 years (about seven months).
JPST has amassed around $22 billion in fund assets, making it one of the largest active ETFs in the world.
An example of the fund’s active management was when fund managers reported they had “actively reduced [their] allocation to investment-grade corporate credit, CLOs [collateralized loan obligations] and ABS [asset-backed securities] with the view that continued rate volatility would lead to spread volatility.”
The ETF carries an expense ratio of 0.18% and pays out monthly dividends.
How to invest in SHV, JPST and BIL
You can invest in these ETFs using a brokerage platform like Syfe Trade. You enjoy free trades every month and super low commissions on trades thereafter.
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