Recent data from the Investment Company Institute indicates that as of mid-June, there’s a record $6.12 trillion in cash sitting in money market funds. Some cash instruments are yielding in the neighborhood of 5%. So it’s understandable why some investors might look to eschew risk while pocketing alluring yields.
However, that $6.12 trillion implies many market participants aren’t taking full advantage of the seemingly undaunted rally in equities. Likewise, income investors may be missing out by sticking with cash over bonds for too long.
The Eaton Vance Total Return Bond ETF (EVTR) is one fund that could be an attractive alternative to cash for prescient investors.
After all, yields on cash won’t remain this high permanently. When the Federal Reserve finally lowers interest rates, which could happen twice before the end of this year, cash will become less attractive. Obviously, bond yields will decline as rates do the same. But EVTR arguably offers more perks and utility than money markets.
EVTR Could Be Better Bet Than Cash
One of the reasons EVTR could prove more advantageous to investors than money markets is the ETF’s 30-day SEC yield of 5%. That matches what’s found on many money market funds. But the advantage comes from the point that history proves a higher a bond’s yield is when an investor gets involved, the shorter the odds of success. Relative to historical norms on aggregate bond funds, EVTR’s current yield is relatively high.
Additionally, EVTR sports an effective duration of 5.91 years. That’s intermediate-term territory. But it’s also high enough that the ETF should realize some tangible benefits when the Fed lowers rates. EVTR’s status as an intermediate-term bond fund has the added advantage of allowing income investors to add duration in incremental fashion.
“Investors can extend duration slowly. Oftentimes, this process happens first through short-dated investment-grade bonds, and then more intermediate longer-dated bonds. Falling yields also mean more price appreciation for bonds, which investors can’t achieve with cash,” noted Morningstar analyst Sarah Hansen.
Due to the fact that duration is a measure of a bond’s sensitivity to interest rate changes, EVTR’s duration implies the actively managed ETF offers more benefit at times when rates are stable or declining than does cash.
As an actively managed fund, it’s possible EVTR’s duration could increase as rate cuts near. That could potentially provide a pathway to larger gains as the Fed cuts borrowing costs.
For more news, information, and analysis visit The ETF Yield Channel.