Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

Regular AAC (Asset Allocation Composite), SAA and TAA portfolios are always rebalanced on the first trading day of a month. the next re-balance will be on Thursday December 1, 2022. 

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

How To Maximize Your Cash Return

We discuss several ways to maximize your cash returns including money market mutual funds, ETFs and purchase of Treasury bills.

Types of Cash Investments

These days, investors are facing some confusing choices for their cash, which, given the recent bear markets for both stocks and bonds, has become a very important part of their overall capital. In the meantime, a de facto way of putting your cash to a bank savings or checking account is still giving your a pitiful return. For example, Bank of America checking and savings yields are still close to 0%, even for 12 month CDs. To save our letter space, we won’t show this long list to you but we encourage you to look at the link yourself.

Bank of America’s CEO and other bank CEOs boasted of their good results in the latest quarter earnings report. They specifically mentioned that low deposit interests paid to their customers resulted in large windfall for their earnings: the banks took your deposit cash and make loans to (safest) government bonds and (less safe) other business loans that pay much higher interests. However, they have been able to pay measly interests to you thanks for your ignorance and laziness. An example, you deposit $1,000 and get paid $1 (0.1%) annually while the bank lend your $1,000 to the US government for 3 months. Our last check indicates that the 3 month Treasury bill is paying 4.3% or $43 for the $1,000. So the bank rakes in $42 and you get paid $1!

On the other hand, as what we have advocated all along,  you can put $1,000 to a brokerage account (such as TD Ameritrade, Fidelity, etc) and then you can do one of the following:

  1. Money market funds: purchase or automatic sweep to a money market mutual fund
  2. ‘Money market’ ETFs: buy one of a ‘money market’ ETFs and get paid the interests from Treasury or corporate bonds/loans minus an expense of 0.15% or so.
  3. Treasury bills or CDs: you buy Treasury bills or CDs from the brokerage account or from (more hassle).

Let’s take a look at what interests each type can get and how much hassle you have to deal with.

Money market mutual funds

We did look at these brokerage money market mutual funds before. Here is info from some of major brokerages:

Name Interest
Fidelity Government Money Market (auto sweep) 3.29% (7 day yield)
Schwab auto sweep 0.4%
Schwab purchased money market (has to manual buy/sell) 1.64% to 3.89% (depending on value)
TD Ameritrade No auto sweep
Etrade No auto sweep
Vanguard (auto sweep) 3.61%

In general, it’s disappointing to see that brokerages are still trying to squeeze as much interest spread as possible by either not offering high interest paying money market funds or making it harder to do so (requiring manual buy/sell). The exceptions are Fidelity and Vanguard, both of which are non-public companies. It’s actually well known that Schwab derives large profit from the interest spread!

‘Money market’ ETFs

Technically, these ‘money market’ ETFs are not offered as money market funds that have an implicit value guarantee of at least 99.5% of investors’ original capital, or you will not lose more than 0.5%. It’s very rare to lose money from a money market fund. In fact, the latest incidents of money market breaking a buck (or quoted as losing its principle) was in 2008 but eventually all investors’ money were made whole.

We have written several newsletters on these ETFs:

The following are 3 major Treasury bill or Treasury floating rate ETFs (as of 11/17/2021):

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR Expense Total Asset Average Daily Volume SEC Yield
BIL (SPDR Barclays 1-3 Month T-Bill ETF) 1.2% 1.2% 0.5% 1.1% 0.135% 26.4B 6.7M 3.11%
USFR (WisdomTree Floating Rate Treasury Fund) 1.5% 1.4% 1.0% 1.8% 0.15% 12.2B 3.6M 2.46%
TFLO (iShares Treasury Floating Rate Bond ETF) 1.5% 1.5% 0.7% 1.2% 0.15% 3.8B 1.3M 3.85%
CASH (CASH) 1.1% 1.1% 0.5% 0.8% N/A N/A N/A N/A

Both USFR and TFLO are delivering better returns than BIL and CASH. Notice CASH is MyPlanIQ’s internal symbol that we use daily 13-week Treasury bill interest index to calculate its returns. We are actually ‘pleasantly’ surprised that BIL is actually outperforming CASH, considering it needs to subtract the 0.135% expense from its raw return.

We also caution on SEC yield figures as these funds might use different ways and/or distribute interests at different frequency. What really counts is the total return figure.

Here are some detailed explanation on each fund:

  • BIL: it holds 1-3 month Treasury Bills. It will roll or purchase 3 month Treasury bills as the old ones are mature. At the moment, based on Morningstar, its average maturity is 0.07 yr or 0.84 month, a bit short in the current environment as the Federal Reserve is continuing to raise interest rates non-stop.
  • USFR and TFLO: both are holding Treasury Floating Rate Notes that are mature in two years. Based on Treasury Department website, the FRN (Floating Rate Note) (a note is a technical term for a Treasury bond whose maturity is no longer than 10 years) has the following characteristics:

The interest rate is the sum of the weekly 13-week Treasury bill auction interest rate + a spread. It’s reset every week. Notice that the spread stays the same in the whole life of the note. In general, we can mostly expect the interest rate is reset everyweek close to the latest 13-week Treasury bill’s interest.

Oh, roughly, USFR or TFLO will give you a yield that’s close to theoretical CASH interest rate that’s defined as the 13-week Treasury bill interest, plus or minus the spread (sometimes is positive and sometimes is negative) minus 0.15% expense paid to fund managers.

Compared with BIL, USFR and TFLO will return better in a rising rate or flat rate environment as it has the interest constantly adjusted to the longest (3 months or 13 weeks) bill. But BIL will do better in a period when the Federal Reserve is lowering interest rates. Since  interest rates will stay flat most times, we believe USFR and TFLO have better returns in a long period of time. In the current environment, they have been and will do better.

For example, unless some dramatic events happen, we expect the Fed will continue to raise or keep interest rates high till to mid next year. So in this period, USFR and TFLO will do better than BIL. In fact, we expect they will deliver an annual interest rate higher than 4% in this period and we expect they will outperform most money market funds mentioned above, even for large accounts that can get better class (such as institutional) of a money market fund that has much lower expense ratio.

Simply put, we believe USFR and TFLO can be used as cash substitutes to get interests as high as or even higher than those of institutional money market funds.

With commission free trades, what’s not to like to park your money to these funds? Or why do you still want to put most of your cash to a bank account?

Treasury bills and CDs from brokerages

We also have touched this topic many times:

The following are the latest rates a Vanguard client can get from the Treasury bills (mature within one year) and CDs:

You can basically buy these Treasury bills or brokered CDs from a so called secondary market (i.e. a second hand from a dealer or other investors) in major brokerages including TD Ameritrade, Fidelity, Schwab, Vanguard, Etrade, etc. In general, we have found the rates are similar but Fidelity and Vanguard generally offer the best rates.

The advantage of buying these bills and CDs in a brokerage account is that you are probably getting slightly better rates than from the ‘money market’ ETFs mentioned above (and definitely much better than the money market funds some offer (if any)).

The cons are that you’ll have to find buyers if you want to sell your Treasury bills or CDs before they are mature. For Treasury bills, they are generally liquid enough but you might not be able to get a favorable price if you are in a hurry. This compares with the very liquid BIL, USFR or TFLO which you can easily sell if you need cash.

Market overview

US economy has been very resilient: retail sales, industrial output and the important unemployment rate indicator are all exhibiting characteristics seen in an expansion period. The inflation pressure seems to start to level off somewhat. Unfortunately, this latter point that inflation is still high though rate of rising is leveling off plus the strong economy with high labor cost pressure will only force the Federal Reserve to continue their interest rate hike. On the other hand, the effect of elevated interest rates is still yet to be fully realized. Corporate earnings will very likely decline in double digits next year and the economy is extremely likely to go into a recession next year. All of these are pointing to further weakness in stocks and bonds.

At any rate, markets are hanging high in the hope of a Federal Reserve’s rate pivot (stop raising rates or even slashing rates). Subjectively, we believe this is extremely unlikely but as always, we’ll let our strategies decide and execute accordingly.

We stay the course with our strategies and reiterate the following:

  • 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 preferably much longer given the current high valuation. 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 and preferably many more 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 has dropped and now valuation is becoming less hostile. However, it is still not cheap by historical standard. For the moment, we believe it’s prudent to be extra cautious. 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.

We wish everyone a pleasant Thanksgiving Holiday! Stay Healthy!

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