This is not investing advice. This post is for informational purposes only. Any investment decisions should be made only after careful research.
One of the great things about having an array of investable assets at your fingertips (like in the Abra app) is that you can deploy different assets at different times to achieve different objectives.
Let’s take a closer look at some of the exchange-traded funds (ETFs) that might be useful for storing cash assets while waiting for favorable market conditions to develop before investing in other securities.
These ETFs, which track bond markets, are good alternatives to just holding cash because they have return-earning potential and because they have a low-risk profile.
Top reasons for adding low-risk ETFs to your portfolio
Before proceeding, a quick note about US Treasury-backed securities. There are three different kinds of assets backed by the United States Treasury. They are all considered fixed-income and they are considered low risk because they are collateralized by the US government.
- Treasury bills are debt payments that mature in a year or less. The bills are sold by the US government at less than face value and mature to the full value by the end of a pre-determined period.
- Treasury notes mature between two and 10 years. Interest is paid out every six months and the interest rate increases based on the time to maturity (so, the longer a note takes to mature, generally, the higher the interest rate).
- Treasury bonds operate like Treasury notes, but they have a maturation time of 10 years or longer. Like notes, the interest on Treasury bonds is paid every six months.
Abra users can find two short-term Treasury ETFs, one short-term Treasury/corporate bond ETF, and one short-term corporate bond ETF in the app.
The reason that all of the ETFs deployed in this strategy are short term is that interest rates are more stable when the bond fund only has a few months left before hitting maturity. In other words, these ETFs offer a relatively stable place to park cash while waiting for market conditions to develop — and they earn interest.
Here’s a look at these ETFs in more detail:
iShares Short Treasury Bond ETF (SHV)
This ETF tracks an index of US Treasury bills, bonds, and notes with a maturation time between one month and 12 months. The ETF averages a standardized interest rate of 2.34 percent.*
iShares Short Maturity Bond ETF (NEAR)
This ETF contains a blend of Treasury bonds and corporate bonds. The corporate bonds are spread across industries and geographies. The standardized yield is 2.58 percent.*
SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL)
This ETF tracks the Bloomberg Barclays 1-3 month US Treasury Bill Index. The fund’s standardized yield is 2.16 percent.*
Invesco Ultra Short Duration ETF (GSY)
This ETF is composed of corporate bonds across industries and geographies that are set to mature in less than a year. The standardized yield for the fund is 2.63.*
Investors keep cash on hand for lots of reasons, such as waiting for the right time to buy a market dip or to trade on news headlines. Regardless of why investors want to hold a cash position, the availability of interest-bearing, stable ETFs means that Abra users don’t have to just stay parked in cash. Instead, you can earn a return on the cash while you wait for the right conditions on other investments.
Like other assets on Abra, the ETFs outlined above are all available in fractional amounts.
*A standardized yield rate, also known as the SEC yield rate, is used to make comparing the return of bonds and bond-like products easier. The standardized yield is calculated using the most recent 30-day SEC filings and reflects interest and dividends minus expenses (in the case of ETFs, there is usually some kind of management fee). All standardized yields cited above are based on numbers reported in early July 2019.
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