Would Harry put his Cash allocation in SHY and SHV?

[annieB]

Since early 2007,SHY has traded up from $68 to $84.
SHV has traded up from $102 to $110.
With the puny yields these ETFs offer,aren't these too risky
for the cash allocation?If rates turn higher and SHY falls from
$84 to $68,aren't we going to get clocked?
Anyone know if Schwab has a good treasury money market fund?
Would that be a better choice?
Thanks...

[melveyr]

As long as the upward move in rates isn't very sudden and extreme, both of those ETFs would benefit from rising rates because you would be rolling over into high yielding bonds fairly quickly.

However, Mr. Browne would probably endorse directly held bonds or a Treasury money market fund over the ETFs because of lower counter-party risk. The ETFs use security lending to line the providers pockets with additional income and there is the risk that the people who the fund lent securities to fail to promptly return them when needed.

[HB Reader]

Since early 2007,SHY has traded up from $68 to $84.
SHV has traded up from $102 to $110.
With the puny yields these ETFs offer,aren't these too risky
for the cash allocation?If rates turn higher and SHY falls from
$84 to $68,aren't we going to get clocked?
Anyone know if Schwab has a good treasury money market fund?
Would that be a better choice?
Thanks...

Schwab has a Treasury money fund, but I don't think it is open to new investors.  A Treasury money fund would be best, but as a practical matter funds like SHV may be the best you can do right now for fairly small amounts. If rates go up, you take an immediate hit but the rising rates start showing up in the fund's yield fairly quickly. By the way, Schwab has it's own non-transaction fee ETF, SCHO, that is similar to SHV.  The biggest drawback (although not too big a deal) I have experienced with SHV and SCHO is you have to wait 3 days for everything to clear before you can withdraw funds, just like with a stock.  Obviously, if the amounts are a little larger you can also just buy T-Bills of various maturities.

There aren't many Treasury money funds open to new investors anywhere.  With rates so low, they are losing (or break even, at best) propositions for the fund companies. 

[rickb]

As long as the upward move in rates isn't very sudden and extreme, both of those ETFs would benefit from rising rates because you would be rolling over into high yielding bonds fairly quickly.

However, Mr. Browne would probably endorse directly held bonds or a Treasury money market fund over the ETFs because of lower counter-party risk. The ETFs use security lending to line the providers pockets with additional income and there is the risk that the people who the fund lent securities to fail to promptly return them when needed.

For SHY and SHV I think the main risk is what the sponsor does with the lender's collateral.  When we looked into TLT lending a while ago (I suspect SHV and SHY are run under similar rules), the lending agreement was that the borrower must put up something very close to cash (like treasury securities) as collateral, marked to market every day.  I have no idea why anyone would bother borrowing short term treasuries if they have to put up exactly the same amount of short term treasuries as collateral, but the interesting thing is what happens next.  BlackRock (the sponsor of SHV, SHY, and TLT) can "invest" the collateral in its own money market funds, not treasury backed.  If something very bad happens, the fund (i.e. BlackRock) might not be able to return the full collateral due the borrower when the borrower pays back the loan (!).  This would be a MF Global sort of scenario.  I think the bottom line is SHY and SHV are not as fully backed by treasuries as one might think.

Of course, open ended 'treasury backed" MM funds can and do engage in securities lending as well.  I would suggest anyone using any ETF or fund for their cash allocation seriously look into the lending policies.  The nature and amount of the collateral is important, but the restrictions on what can be done with the borrower's collateral is important as well.

Certainly SHV and SHY or even a treasury backed MM fund are more convenient than running a ladder of short term treasuries (through a broker or TreasuryDirect), but I would suggest anyone who can deal with short term treasuries directly seriously consider doing so.  IMO, this is very much like buying physical gold coins as opposed to any of the paper gold alternatives.  If push comes to shove, BlackRock will not be your friend.

[annieB]

Excellent replies.
I'm still concerned that SHY yields about 1/3 of one percent and holds a fair amount
of treasuries maturing in 2 1//2--3.0 years.
I'll talk to Schwab next week on their funds.
Better not be loaning them out...Oh my!

[notsheigetz]

I've wondered about this myself because I don't think HB ever went through a period like this when there was so little reward for holding cash. Actually, he saw some ridiculously high returns on cash during a lot of his investing life.

[WildAboutHarry]

As rickb says, counterparty risk in SHY and SHV make them less than ideal.

Aside from directly owning Treasury bills, I-bonds seem to be the most direct link to government-guaranteed cash with reasonable rates (if you consider zero % real to be reasonable).

[Kshartle]

I've wondered about this myself because I don't think HB ever went through a period like this when there was so little reward for holding cash. Actually, he saw some ridiculously high returns on cash during a lot of his investing life.

Having read all of Harry's investment books, I can't believe he would be holding T-bills or USD at all. Wtih rates being so clearly negative right now it looks like all your getting is reward-free risk.

That being said HB was not omniscient when it came to investments just like no one else is. When you read "You can profit from the coming devaluation" and "You can profit from a monetary collapse" you see that was not opposed to making intelligent predictions about the future and trying to profit from them. He understood economic reality.

I think the PP was really set up for everyday people to just have a simple program to follow that can't really be messed up. It's less than ideal though at times like these I think and cash right now is a huge drag. To that end I hold no cash other than about 2 month's expenses in the bank.

Maybe if you're time horizon is short it makes sense from a risk perspective but if you've got anytime at all it's hard to imagine a worse investment other than LTTs right now.

Ohhhh well, I know this line of thinking is heretical.

[Pointedstick]

I don't think it's heretical. LTTs do indeed become more stinky the lower rates go, and there's a practical point at which it really doesn't make sense to buy any more. Is that point at 3%? 2%? It's almost definitely 1%. There was a recent thread discussing the point at which people would buy less or shorten the duration of their bond holdings or something.

But I think cash is actually more useful in this situation, since it adjusts to interest rates very rapidly. If rates rise and your bonds get crushed, your T-bills or T-bill-ish funds will adjust rapidly and not only preserve their value, but return you more income from the rising coupon payments.

[AdamA]

Since early 2007,SHY has traded up from $68 to $84.
SHV has traded up from $102 to $110.
With the puny yields these ETFs offer,aren't these too risky
for the cash allocation?If rates turn higher and SHY falls from
$84 to $68,aren't we going to get clocked?
Anyone know if Schwab has a good treasury money market fund?
Would that be a better choice?
Thanks...

I think HB would have said that these funds were fine for someone to use, so long as that person understood, and was comfortable with, their risks, as compared to tbills.

[craigr]

Re: Treasury funds.

Ideally your cash should be very short term T-Bills with durations well under a year. Most T-Bill funds will have durations around six months or so. There is some interest rate risk, but it's not terrible. There is no way to avoid it. If you want to use an ETF, then SHV would fit this bill as the price is pretty stable.

If you have a good chunk of cash beyond a year in living expenses and you want to try to get some better yield, but trade off some interest rate risk if you can ride out a rise, then you can consider a ST Treasury bond fund of 1-3 year duration max. But this is totally optional and there is nothing wrong with just keeping everything in very short term cash. Just some people are comfortable keeping their extra cash outside of immediate/emergency needs in something with some more interest rate risk if they can wait around and let the NAV recover if rates rise quickly.

All Treasury funds at this point have these risks whether you get them from iShares, Schwab, etc. Some funds are better than others though in terms of what they are holding. However due to the management of rolling out old bills as they expire and buying new ones, most people will find it easier to just punt and get a fund vs. doing it themselves. The more adventurous may find using using some of the bond tools at brokerages today will allow them to do it themselves, but I suspect most of them are in the minority.

[sophie]

For reasons like those cited above, I'd vote against keeping "shallow cash", i.e. emergency funds and potential rebalance money, in SHY, SHV or their equivalents.  The whole point of holding cash is that the value won't drop in a sharp recession like 2008 (or 1981).

I'm not sure if this is the case at Vanguard or Schwab, but at Fidelity you can opt to set your core brokerage account to SPAXX, their treasury money market:

You can change your core account at any time by calling a Fidelity Representative at 800-544-6666; you cannot change your core account online.

This lets you get around the $25,000 minimum on this fund.  It earns exactly zero interest, of course.

Buying T-bills directly should be doable for most everyone on this board - the auto rollover options at Treasury Direct, Fidelity and other brokerages make this distinctly easier than it would have been in HB's day.

[MediumTex]

Spreading your cash across several instruments (SHY or SHV, a treasury money market fund, individual t-bills, Ibonds, and perhaps a bit in an FDIC insured account) is probably the simplest way of managing risk in the cash allocation.

A 100% t-bill approach does, of course, work just fine.

As far as the PP heresy stuff goes, I think that it's fine to do whatever you want with your cash as long as you understand the risks.  I would, however, make sure that you understand the interest rate risk and default risk very well when thinking about any cash investment.

[Ad Orientem]

Given the choice between SHY (or its Schwabb equivalent SCHO) and SHV I would stick with SHV. Cash is not intended to be a money maker. It's there for safety. And while I concede that barring a sudden and sharp rise in interest rates SHY is probably low risk, SHV is very low risk. The additional yield from SHY is insignificant and IMHO doesn't justify the added risk.

The future is unpredictable but that doesn't mean we need to ignore what's going on in the world. There has been a 32 year bull market in bonds. Interest rates are at or near record lows. The FED is printing money like it's going out of style (85 billion per month). Could rates go much lower? Yes, and that's why we hold LTTs. But my gut says the three decade long party in the bond market is winding down. T Bills vs T Notes in a potentially rising interest rate environment should be a no brainer.