January 22, 2022

The World Stock Markets Tips & Targets, News, Views & Updates

The World Stock Markets Tips & Targets, News, Views & Updates

Cash Parking Choices: A Look At SHY And Alternatives

Puppy Hiding

EllenMoran/E+ via Getty Images

When we last covered iShares 1-3 Year Treasury Bond ETF (SHY) we had a clear bias to stay away. Specifically we said,

But to park it in SHY and earn less than 10 basis points annually makes no sense. Yet $19 billion is parked in there and the premium is about 3 months of net yield.

Source: A Cash Parking Choice For SHY Investors

Now, while we would like to take credit for telling you that you were wasting your time here, even we were surprised at what the total returns were from that point.


A Cash Parking Choice For SHY Investors

A loss of 0.87% is not a lot, but that is not what you are supposed to take when cash is the asset you are aiming for. What happened and can that be an opportunity for you? We look at that today.

Return-Free Risk In Action

Investors who bought SHY at that point lost about 10 years worth of yield demonstrating what we have called Treasury bonds for some time. Return-Free Risk. While SHY was offering a stunning 9 basis points worth of net yield, it had an average duration of close to 2 years. A duration of 2 years means that a 1% sudden increase in interest rates would decrease NAV by about 2%. Actual yields rose by about 64 basis points on the two year Treasury.

2 year Treasury Rate
Data by YCharts

So that would imply a 1.28% drop in NAV. Actual drop was lower as this did not happen immediately. The duration implied NAV drop is only accurate for an immediate move. A slower move will decrease the impact as the fund has more assets maturing over that time with a chance to reinvest in higher yields. A slower move also allows the fund to earn more interest in the interim. So the drop is about on par with what you would expect for the 64 basis point move in the 2 year yield.

What’s Next?

SHY’s duration remains unchanged but the replacement of old bonds with new as well as the price decline on existing bonds, has changed the SEC yield. This is now at 0.56%.

SHY ETF portfolio

Source: iShares

This is a big improvement from the 0.09% (within striking distance of James Bond) you were getting last time. From a cash perspective this still reeks. Not only is this far below inflation, but it is still a small yield for the current duration risk. Obviously over $20 billion disagrees with our view.

SHY 1 year chart

SHY Chart

Seeking Alpha

What To Buy Instead?

Lucky for you, we examined alternatives that you might normally find worthy of consideration. PIMCO Enhanced Short Maturity Active Exchange-Traded Fund (MINT) is one we have written about previously. At 0.44% SEC yield you are definitely getting paid less.


MINT SEC Yield. Source: PIMCO

But MINT has a 0.78 year duration on its bond portfolio. This makes it probably a better bet in case rates continue to move up.

BlackRock Short Maturity Bond ETF (NEAR) is another one that we cover for investors. This one has actually has the most interesting profile. The SEC yield matches that of SHY and it has a much shorter effective duration.

NEAR fund portfolio

NEAR SEC Yield Source: iShares

How exactly is NEAR achieving this level of yield with a lower duration? The answer is that it is sliding down the credit quality scale.

NEAR fund exposure breakdowns

NEAR Credit Quality Source: iShares

We don’t see this as a major risk especially over this timeframe (about half year duration). The fund is very well diversified, so a single issue will not make or break it either.

Where To Get Some Real Yield?

Obviously these fund yields are not going to satisfy anyone. Any more yield you get though comes with additional risk. That risk can be duration risk, equity risk or credit risk. We will go over some things we like here for yield, but keep in mind that we are taking one or more risks mentioned above. We just think that reward justifies the risk in those plays, unlike what we see in the rest of the market.

For Canadian investors, we continue to strongly bet on the convertible debentures of Diversified Royalty Corp (OTCPK:BEVFF) which trades on TSX with the symbol DIV.DB. We remain neutral on the common shares but the convertible debentures trading on the TSX offer a 5% plus yield to maturity in less than 12 months. You are sacrificing relative liquidity here as as getting out in 3 seconds is not always possible with this security. Fundamentally, BEVFF is firing on all cylinders with 3X interest coverage and it recently hiked its dividend. Liquidity is more than adequate and the issue is very small, just $55 million CAD.

For US investors, we like the American Finance Trust Inc. (AFIN) preferred shares AFINO and AFINP. Here you are taking far more risk in terms of duration and the full description of these securities can be read here. We like the yield to call and think you are getting paid adequately to stick your neck out.


SHY yield has improved significantly since we last covered it. We like NEAR a bit more here as the duration risk is lower. Neither offer a great yield but at this point at least the chances of losing money are far lower. We like the idea of taking selective credit risk where the market is paying us far more to do so. BEVFF and AFIN related securities offer that in this market.

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