March 22, 2021: Ultra Short Term Bond ETF Portfolio As A Money Market Fund

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Ultra Short Term Bond ETF Portfolio As A Money Market Fund

Last week, we discussed how to make your own private bank. In the newsletter, we mentioned that, in addition to our MPIQ ETF Fixed Income portfolio, one can utilize some ultra short term bond ETFs to form a short term portfolio that can be used for cash needed within a year. In this newsletter, we introduce this portfolio and examine its returns and risk in details.

Portfolios for your short term investments

To recap, in the previous newsletter, we stated that one can break its fixed income investments into 3 parts:

0-3 month cash: Money market funds: the safest (in our opinion, almost the same as cash) are Treasury money market funds. Other higher paying money market funds are prime money market funds that might invest in short term corporate loans/bonds.
3-12 month cash: Ultra short term ETFs or mutual funds: ultra short term Treasury ETFs like BIL or SHY or just short term ETF like MINT or NEAR etc. We will introduce some ultra short term and money market fund style fixed income portfolios soon.
cash needed from 1 year to 5 or 6 years: MyPlanIQ fixed income portfolios like MPIQ ETF Fixed Income or Schwab Total Return Bond (see fixed income page ) that can be used for cash not needed within one year.

We have discussed and monitored our Total return bond fund portfolios listed on fixed income page for more than a decade now. These portfolios have consistently outperformed even the best total return bond funds such as PIMCO total return bond fund (PTTAX), Doubleline total return bond fund (DLTNX) etc. We encourage readers who are interested in fixed income (bonds) investments to read the relevant newsletters on our Newsletters page.

In terms of traditional money market funds, we also covered them in some of our previous newsletters such as:

In general, we favor Vanguard money market funds, along with some funds from Schwab and Fidelity (though they require higher amount invested in them).

In the following, we introduce an ultra short term bond ETFs portfolio that actually can rival money market funds in terms of its price stability and has much higher returns.

MPIQ Ultra ST Bond ETFs portfolio

Portfolio, MPIQ Ultra ST Bond ETFs, utilizes our Asset Allocation Composite on a set of candidate ultra short term corporate and Treasury ETFs:

Asset Class	Ticker	Description
ULTRASHORT BOND	MINT	PIMCO Enhanced Short Maturity Active ETF
ULTRASHORT BOND	NEAR	iShares Short Maturity Bond ETF
ULTRASHORT BOND	ICSH	iShares Ultra Short-Term Bond ETF
SHORT GOVERNMENT	SHV	iShares Short Treasury Bond
Ultra Short Government	BIL	SPDR Barclays 1-3 Month T-Bill ETF

Some of these funds allocations (as of 3/19/2021, Morningstar):

Sectors	NEAR (%)	MINT (%)
Government	0.00	16.8
Municipal	0.00	0.35
Corporate	59.54	52.86
Securitized	24.92	24.26
Cash & Equivalents	15.54	5.73
Other	0.00	0.0

Notice iShares Short Treasury Bond (SHV) invests 100% in Treasury bills. Its effective duration is 0.4 year, a bit longer than money market fund (usually around 0.2 to 0.3 year). This compares with BIL’s 0.08 year effective duration. However, that’s enough for Morningstar to claim it’s a safe cash substitute:

MPIQ Ultra ST Bond ETFs utilizes the fixed income selection algorithm to choose one ETF from the above 5 ETFs every month to invest. The following table compares this portfolio with several funds:

Portfolio Performance Comparison (as of 3/19/2021):

Ticker/Portfolio Name	YTD Return**	1Yr AR	3Yr AR	5Yr AR	Since 12/31/2013
MPIQ Ultra ST Bond ETFs	-0.0%	0.9%	2.2%	2.1%	1.6%
MINT (PIMCO Enhanced Short Maturity Active ETF)	-0.0%	4.9%	2.1%	2.0%	1.53%
ICSH (iShares Ultra Short-Term Bond ETF)	0.0%	4.3%	2.3%	1.9%	1.4%
NEAR (iShares Short Maturity Bond ETF)	0.2%	11.6%	2.2%	1.9%	1.5%
SHV (iShares Short Treasury Bond)	-0.0%	0.0%	1.6%	1.2%	0.85%
Vanguard Prime MM Fund (Now called Cash Reserves Federal MM Fund)***		0.26%	1.57%	1.24%

*: NOT annualized

**YTD: Year to Date

***: Data are from Vanguard site. This money market fund used to be a prime money market fund that can invest in both corporate and Treasury bonds and bills. Vanguard changed this fund to a Federal money market fund last year.

Link

Observations:

MPIQ Ultra ST Bond ETFs portfolio has the highest returns for the past 5 year and since 12/31/2013 when it starts.
The very high one year returns for MINT, ICSH and NEAR are due to the big drops these funds had in March last year when the pandemic just began to materialize. In fact, these big drops are the main factor to disqualify these funds as money market fund substitutes.
Notice compared with these ‘prime’ (corporate, agency and Treasury bonds mix) funds, the pure Treasury bill fund SHV is very stable, again showing the stability of Treasury bills in the time of a crisis.

Money market fund stability

The portfolio maintains its price stability well for the past 7 plus years. This is because of our builtin risk avoidance mechanism when selecting a fixed income bond fund: when markets are in a downturn, the strategy will only choose ‘safe’ Treasury bill or bond funds. This enabled the portfolio to avoid the big bond market debacle in March 2020 when the pandemic hit. It switched to SHV on the first day of March 2020.

The following chart shows the ‘NAV’s of the portfolio for 1, 2, 3 and 6 month rolling returns. The ‘NAV’ is defined as the final value of the portfolio assuming the portfolio’s value at the beginning of a period is 1. For example, the ‘NAV’ 0.9998 for a rolling (consecutive) 3 month period means that it loses 0.0002 out of 1 in this period. Put it another way, it means it loses -0.02% in this period.

The main observation from the above data is that for any rolling 1, 2, 3 or 6 month period, this portfolio’s ‘NAV’ is never lower than 0.9981 (1 month in 12/2014). For rolling 3 month periods, the lowest ‘NAV’ was 0.9983, again, from 10/2014 to 12/2014). For rolling 6 months, there are only two periods when the portfolio’s ‘NAV’ dipped below 1: 0.9993 from 8/2014 to 1/2015 and 0.9999 from 9/2014 to 2/2015. In all other 6 month periods the portfolio has returned positively.

SEC requires that a money market fund to always maintain its NAV above $0.995 (-0.5%). For customers, a money market fund will always honor $1 NAV for your cash when you withdraw. Based on this criterion, the portfolio can actually qualify as a money market fund.

Of course, for your own ‘money market fund’ like this portfolio, when you withdraw during in a losing period, you would have to incur the actual loss. However, this loss is smaller than -0.5% if there is any.

However, utilizing the above portfolio for your short term cash gives a much higher return: for the past 5 to 7 years, it had excessive returns 0.75% to 0.9% annually over SHV! As a comparison, Vanguard prime money market fund (one of the money market funds with highest returns in the market) returned 1.24% annually for the past 5 years. That’s a 0.7% annual difference!

The other advantage of using the above portfolio as a short term cash substitute is that it can be used in any brokerage that offers commission-free stock and ETF trades.

Of course, to be conservative, one should probably rely on traditional money market funds or even just cash reserve for very short term cash need. We think it’s reasonable to allocate to these traditional funds for 1 to 3 month cash needs. If you want to be more conservative, you can go for 6 month or so. You then can allocate some portion to the above Ultra short term bond ETFs portfolio.

Market Overview

It looks like long term Treasury interest rates stabilize somewhat. Investors are swayed in both directions: a rapid post-Covid recovery or a more prolonged pandemic as it’s reported that Europe is now seeing the third wave of the pandemic. Regardless, from a long term perspective, both stocks and bonds are overvalued. However, with so much short term fiscal and monetary intervention, financial asset prices are still on the rise.

We reiterate the following practice:

For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as what we have emphasized numerous times, when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years or longer. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later) will deliver some reasonable returns. As long as you are comfortable with this thesis, you should sit tight and forget about the current gyration.
For tactical investors, again, you have to ignore the current market noise. Furthermore, you should follow your strategy rigorously, especially in a time like this. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This has been shown to be true time and time again.

Stock valuation now reached another high. For the moment, we believe it’s prudent to be cautious while riding on market uptrend. However how serious a correction might be, we have confidence in the US economy in the long term and thus in the stocks in aggregate. We just need to manage through interim losses carefully.

We again would like to emphasize that for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.

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