On March 24, the Federal Open Market Committee (FOMC) once again decided to keep the federal funds rate at 5.25% to 5.5%, reflecting solid economic growth and solid employment recognition, but inflation Continued concerns remain.
“The Federal Reserve continues to evaluate inflation, the health of the labor market, and the trajectory of economic growth, but will not raise front-end interest rates until it is confident that inflation has returned to its 2% target,'' Brian said. We have maintained this tenaciously.” McMullen, senior fixed income ETF strategist at Invesco.
The most immediate impact for investors following the FOMC decision is the continued opportunity to secure competitive yields from short-term investments that often move closely in tandem with the prevailing federal funds rate. That's true.
“Sticky core inflation, stable economic growth, and a resilient labor market have so far pushed out market expectations for a Fed rate cut in 2024,” McMullen said. “This could be a tailwind for high-quality short-term bond funds, as investors continue to be compensated with yields above 5% on short-term liquidity instruments.”
These options combine the security of a high credit rating with minimal sensitivity to interest rate changes, making them attractive compared to stocks and long-term bonds.
“These products are ideal for investors who are saving for a large expense (such as a down payment, college tuition, or major purchase) over a period of approximately one to three years,” says Active Fixed Asset Liability. says John Croke. Vanguard Income Product Management.
According to experts, the five types of short-term investments that are best for generating income are:
Treasury bills (T-bills) are short-term federal government securities issued with maturities ranging from a few days to 52 weeks. These securities constitute the short end of the Treasury yield curve.
T-Bills are sold at a discount to face value, and upon maturity, the government pays the holder the full face value. Essentially, the income investors earn from Treasury bills comes from the difference between the purchase price and the amount the government pays back at maturity.
Treasury bills are backed by the full faith and credit of the U.S. government and are therefore considered one of the safest investments with virtually no credit risk. This makes your investment as safe as possible, making it attractive for those looking for a way to profit from their cash in an almost risk-free manner.
Investors can purchase T-bills directly from the government through TreasuryDirect.gov or, for added convenience, invest in T-bills through exchange-traded funds (ETFs) within a brokerage account.
In particular, T-bill ETFs offer liquidity, allowing them to be bought and sold like stocks, with the added benefit of the possibility of monthly income distributions.
“For example, the Invesco Treasury Bond ETF (ticker: TBLL) holds a portfolio of U.S. Treasury securities with maturities of less than 12 months, allowing investors to trade for a single ticker without having to continually roll their positions. We can provide access to Treasury Bills, and once the proceeds are paid, they can be transferred to multiple accounts,” McMullen says.
Certificates of deposit (CDs) provide a way to earn a steady rate of return if you invest your principal over a given period of time.
“CDs are term deposits offered by banks, typically for terms ranging from months to years,” said Taylor Kovar, founder and CEO of Kovar Wealth Management. . “The guaranteed interest rate makes it a safe and predictable investment.”
One of the main benefits of a CD is that you lock in a fixed interest rate for the entire term. This means that even if interest rates drop, the interest rate on your CD will remain the same, so you can still earn a competitive yield.
However, lock-up periods can be disadvantageous for some investors. “The tradeoff with a CD is that your money is locked in for the life of the CD,” Kovar says. “These are ideal for investors who are looking for a low-risk option and have a specific time period in mind.”
Finally, it's important to shop around for the best CD rates. This can vary significantly depending on the length of your term and your financial institution, with some offering promotional rates that can significantly increase your returns.
For investors looking for an easy and safe option to generate short-term income, a high-yield savings account, or HYSA, can be a viable solution. In addition to daily liquidity benefits, these accounts typically offer annual percentage yields (APY) that exceed traditional checking accounts.
What makes HYSA especially attractive is that it comes with coverage from either the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), depending on whether your account is with a bank or credit union. This insurance means that up to $250,000 per depositor is protected in the event of a financial institution failure.
As with CDs, it's worth doing some research when choosing a HYSA. Different providers offer different APYs, and the terms can vary significantly. Some accounts may have minimum balance requirements or offer promotional rates for new customers. By taking the time to compare your options, you can be sure to find an account that will give you the best return on your savings while keeping your investments safe.
Another avenue for investors seeking safe short-term income within a brokerage account is through a money market fund, such as the NorthCapital Treasury Money Market Fund (NCGXX).
These unique mutual funds invest primarily in high-quality short-term bonds. These include commercial paper, short-term bills, and repurchase agreements. The primary objective of a money market fund is to provide investors with a combination of income, liquidity, and capital preservation.
Prospective investors should understand that money market funds are designed to have a fixed net asset value (NAV) of $1 per share. This means that the stock price does not fluctuate under normal market conditions, which is not the case with other types of mutual funds.
This stability is intended to provide a safe environment for investors' capital, but in extreme market events, such as the 2008 financial crisis, money market funds have experienced “big failures,” or NAV It is worth noting that there were rare instances where the Less than $1.
“We believe that money market funds are currently the best short-term investment for generating income. These types of funds are typically highly liquid, high quality, and offer very short-term investments with little associated risk. Because you invest in bonds,” says Emily Cozad. She is a portfolio manager, research analyst and investment fund specialist at Buckingham Advisors. “Additionally, money market funds are less complex for the average investor, making it easier to choose the best options, invest, and maintain exposure.”
For example, the aforementioned NCGXX currently pays investors a 7-day SEC yield of 5.3% and waives expense ratios down to 0%. Despite being an institutional class fund, NCGXX is open to retail investors and has no minimum initial investment requirements.
Ultra-short-term bond ETFs take advantage of the flexibility of ETF structures to provide investors with a combination of yield and liquidity similar to that offered by money market funds, with some important differences.
These ETFs, such as the Vanguard Ultra Short Bond ETF (VUSB), invest in a variety of short-term, high-quality bonds, primarily with the goal of capital preservation and high current returns.
For VUSB, this includes asset-backed securities, government debt, and investment-grade corporate bonds, with dollar-weighted average maturities targeted at 0 to 2 years. It also has the benefit of monthly income, with a current 30-day SEC yield of 5.1%.
“For investors who may have abandoned traditional fixed income strategies during the losses of 2022, short-term bond funds can also be a logical 'first step' back into fixed income,” says Kroke.
Another popular example is the Invesco Very Short-Term ETF (GSY). “GSY can invest in traditional money market securities such as Treasury Bills, commercial paper, and repurchase agreements, but also other instruments in the fixed income market such as investment grade corporate bonds, agency mortgage-backed securities, and AAA-rated securities. You can also diversify into segments,' “secured loan debt,'' McMullen says.
However, it's important to understand that while very short-term bond funds have relatively low risk, their share prices can fluctuate, unlike the fixed NAV per share of money market funds . The securities of very short-term bond ETFs also involve more credit risk compared to the securities of T-bill ETFs.
