Money market or T-Bill ETF?

[Blake Hampton]

I’m deciding on whether to stick with my Fidelity money market or switch over into BIL. I’m curious on what you guys do with your cash.

[Malmqky]

24 minutes ago, blakehampton said:

I’m deciding on whether to stick with my Fidelity money market or switch over into BIL. I’m curious on what you guys do with your cash.

VMFXX. 
 

I have a Vanguard brokerage account and just let cash chill in the sweep account. 5.3% I believe. 
 

Used to do CD ladders but meh

[TwoCitiesCapital]

3 hours ago, blakehampton said:

I’m deciding on whether to stick with my Fidelity money market or switch over into BIL. I’m curious on what you guys do with your cash.

 

If it's cash as to not bear risk because it may be needed, money market and high yield savings account. 

 

If it's cash that's waiting for a better opportunity to deploy, my preferred vehicle is JSCP at the moment. 

[bargainman]

I get good rates from the cash in Interactive Brokers.  But for my other not so fortunate brokerage accounts I use some combination of SGOV, SHV, and MINT.  that said if it's in a taxable account you probably want to wait till it goes ex-div, otherwise you will be converting some part of your capital into taxable income.

[Ross812]

7 hours ago, blakehampton said:

I’m deciding on whether to stick with my Fidelity money market or switch over into BIL. I’m curious on what you guys do with your cash.

I use spaxx or buy individual treasuries for 0 commission at fidelity. Last year I used 1 year CDs that pay on maturity to shift since income from 23 to 24 as we were in a higher tax bracket in 23.

[Sweet]

I don't like the treasury ETFs for the following reason - please correct me if I am wrong.

 

If interest rates rise, the ETF will drop and if you want to exit the position you have to sell the ETF and take the loss.

 

However when you buy an actual treasury you, and the interest rates rise, you can just wait for redemption at par to exit (if it is a short term bond).

 

So if it is within your means to purchase a treasury why would you buy the ETF?

[Sweet]

13 hours ago, Malmqky said:

VMFXX. 
 

I have a Vanguard brokerage account and just let cash chill in the sweep account. 5.3% I believe. 
 

Used to do CD ladders but meh

 

Never heard of this before, great alternative it seems

[Gamecock-YT]

Keep what I need for the next month or two in a money market account

 

Rest is usually rolled in T-bills from 4-16 weeks in maturity for the added yield and the tax advantage

 

Anything in brokerage tax free accounts I keep in a cash sweep or tempcash fund for the liquidity

 

 

 

[TwoCitiesCapital]

10 hours ago, Sweet said:

I don't like the treasury ETFs for the following reason - please correct me if I am wrong.

 

If interest rates rise, the ETF will drop and if you want to exit the position you have to sell the ETF and take the loss.

 

However when you buy an actual treasury you, and the interest rates rise, you can just wait for redemption at par to exit (if it is a short term bond).

 

So if it is within your means to purchase a treasury why would you buy the ETF?

 

Why can't you just wait a similar amount of time for the treasury ETF to amortize back to "par" i.e. rise in value? 

 

Owning a vehicle that owns bonds isn't any different than owning them yourself in regards to how it behaves for rising/falling rates.

 

The primary differences come from fees and management decisions around what to buy/sell with inflows/outflows and the overall portfolio characteristics (average maturity/duration, coupon, etc). 

 

If you don't trust a professional manager to make those decisions on your behalf, then you shouldn't own a fund in the first place. Basically, it has nothing to do with how the vehicle behaves in response to interest rates.

Edited March 1 by TwoCitiesCapital

[Luke]

Money market: Xtrackers II EUR Overnight Rate Swap UCITS ETF 1C

 

Plain and simple. 

[Sweet]

1 hour ago, TwoCitiesCapital said:

 

Why can't you just wait a similar amount of time for the treasury ETF to amortize back to "par" i.e. rise in value? 

 

Owning a vehicle that owns bonds isn't any different than owning them yourself in regards to how it behaves for rising/falling rates.

 

The primary differences come from fees and management decisions around what to buy/sell with inflows/outflows and the overall portfolio characteristics (average maturity/duration, coupon, etc). 

 

If you don't trust a professional manager to make those decisions on your behalf, then you shouldn't own a fund in the first place. Basically, it has nothing to do with how the vehicle behaves in response to interest rates.

Will it return to par though.  Eg.

 

https://finance.yahoo.com/quote/SHY/

 

5 year view.  That should be mean reverting but it’s not.

[gfp]

I hesitate to mention this product, because I don't recommend it and I think the LAST place to get cute and inject risk is your t-bill position - but I did sort of find this fascinating and clever and *so far* it has been working.  The idea is an ETF that earns the risk free short term rate (~5.2%) but doesn't generate taxable income like T-bills and if you hold the ETF for over a year an individual investor can turn "t-bill" type interest into a long term capital gain for tax purposes.  Plus the tax can be deferred until you sell the ETF.  BOXX has tracked BIL, the SPDR 1-3m t-bill ETF almost exactly.

 

I should point out that if you held this for less than a year and lived in a state with an income tax (t-bill interest isn't subject to state tax) you would probably be worse off after taxes than the t-bill or t-bill etf.

 

The fund mostly uses box spreads on the S&P500 index - cash settled, non-directional index option spreads, capturing the risk free rate imbedded in the trade (you could do this to synthetically borrow or lend, this fund is lending).

 

But then, taking advantage of a loophole in ETF rules, they will also occasionally buy a box spread on Booking Holdings, a high price per share stock.  They can then use a friendly trader (Wolverine Trading in Chicago) to "buy" just the profitable leg of the Booking Holdings options as an in-kind redemption of the ETF fund.  And retain the losing leg of the Booking box spread to book the tax losses.  Read the bloomberg article below for the specifics but it's clever and that's why I mention it.  

 

 

 

https://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=BOXX&insttype=&freq=1&show=&time=9

https://www.bloomberg.com/news/articles/2024-02-22/this-exchange-traded-fund-mimics-t-bill-returns-without-tax-bills

Edited March 1 by gfp

[Santayana]

18 minutes ago, Sweet said:

Will it return to par though.  Eg.

 

https://finance.yahoo.com/quote/SHY/

 

5 year view.  That should be mean reverting but it’s not.

For a treasury ETF that you want to act like a cash equivalent, you pretty much have to stick with the ultra short durations.  I park cash in SGOV which is almost completely agnostic to rate changes other than the monthly distribution.

[Blake Hampton]

1 hour ago, gfp said:

I hesitate to mention this product, because I don't recommend it and I think the LAST place to get cute and inject risk is your t-bill position - but I did sort of find this fascinating and clever and *so far* it has been working.  The idea is an ETF that earns the risk free short term rate (~5.2%) but doesn't generate taxable income like T-bills and if you hold the ETF for over a year an individual investor can turn "t-bill" type interest into a long term capital gain for tax purposes.  Plus the tax can be deferred until you sell the ETF.  BOXX has tracked BIL, the SPDR 1-3m t-bill ETF almost exactly.

 

I should point out that if you held this for less than a year and lived in a state with an income tax (t-bill interest isn't subject to state tax) you would probably be worse off after taxes than the t-bill or t-bill etf.

 

The fund mostly uses box spreads on the S&P500 index - cash settled, non-directional index option spreads, capturing the risk free rate imbedded in the trade (you could do this to synthetically borrow or lend, this fund is lending).

 

But then, taking advantage of a loophole in ETF rules, they will also occasionally buy a box spread on Booking Holdings, a high price per share stock.  They can then use a friendly trader (Wolverine Trading in Chicago) to "buy" just the profitable leg of the Booking Holdings options as an in-kind redemption of the ETF fund.  And retain the losing leg of the Booking box spread to book the tax losses.  Read the bloomberg article below for the specifics but it's clever and that's why I mention it.  

 

 

 

https://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=BOXX&insttype=&freq=1&show=&time=9

https://www.bloomberg.com/news/articles/2024-02-22/this-exchange-traded-fund-mimics-t-bill-returns-without-tax-bills

Saw it in a recent write-up in Money Stuff and definitely think it’s interesting. It scares me though how complicated it is.

[bargainman]

14 hours ago, Sweet said:

I don't like the treasury ETFs for the following reason - please correct me if I am wrong.

 

If interest rates rise, the ETF will drop and if you want to exit the position you have to sell the ETF and take the loss.

 

However when you buy an actual treasury you, and the interest rates rise, you can just wait for redemption at par to exit (if it is a short term bond).

 

So if it is within your means to purchase a treasury why would you buy the ETF?

 

Well it depends sgov is 0-3 months  so it really won't go down much.  SHV is short term but slightly longer than that.

[backtothebeach]

8 hours ago, gfp said:

I hesitate to mention this product, because I don't recommend it and I think the LAST place to get cute and inject risk is your t-bill position - but I did sort of find this fascinating and clever and *so far* it has been working.  The idea is an ETF that earns the risk free short term rate (~5.2%) but doesn't generate taxable income like T-bills and if you hold the ETF for over a year an individual investor can turn "t-bill" type interest into a long term capital gain for tax purposes.  Plus the tax can be deferred until you sell the ETF.  BOXX has tracked BIL, the SPDR 1-3m t-bill ETF almost exactly.

 

I should point out that if you held this for less than a year and lived in a state with an income tax (t-bill interest isn't subject to state tax) you would probably be worse off after taxes than the t-bill or t-bill etf.

 

The fund mostly uses box spreads on the S&P500 index - cash settled, non-directional index option spreads, capturing the risk free rate imbedded in the trade (you could do this to synthetically borrow or lend, this fund is lending).

 

But then, taking advantage of a loophole in ETF rules, they will also occasionally buy a box spread on Booking Holdings, a high price per share stock.  They can then use a friendly trader (Wolverine Trading in Chicago) to "buy" just the profitable leg of the Booking Holdings options as an in-kind redemption of the ETF fund.  And retain the losing leg of the Booking box spread to book the tax losses.  Read the bloomberg article below for the specifics but it's clever and that's why I mention it.  

 

 

 

https://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=BOXX&insttype=&freq=1&show=&time=9

https://www.bloomberg.com/news/articles/2024-02-22/this-exchange-traded-fund-mimics-t-bill-returns-without-tax-bills

 

BOXX, SGOV and BIL have pretty much identical performance (dividend adjusted charts below). I'd be nervous about unexpected risks if I had a lot of money in BOXX. The tax aspect, if it holds, makes BOXX superior if you live in a tax advantaged jurisdiction.
I wonder if, when buying SGOV on the first of the month and selling it on the last, the gains would be treated as capital gains or dividends with withholding tax.

 

 

 

 

Edited March 2 by backtothebeach

[Sweet]

9 hours ago, Santayana said:

For a treasury ETF that you want to act like a cash equivalent, you pretty much have to stick with the ultra short durations.  I park cash in SGOV which is almost completely agnostic to rate changes other than the monthly distribution.

Does look better that one.

[scorpioncapital]

is anyone worried money market etfs might have liquidity issues in a panic?

[Blake Hampton]

2 hours ago, scorpioncapital said:

is anyone worried money market etfs might have liquidity issues in a panic?

This is my main concern and the reason I haven’t decided on it. I really like the  extra return but I don’t quite understand the risk, if any, of principle loss.

[TwoCitiesCapital]

4 hours ago, scorpioncapital said:

is anyone worried money market etfs might have liquidity issues in a panic?

 

What we saw for client accounts in 2020 was that we continued to get daily/intra-day liquidity for bond ETFs and Mutual Funds in 2020, but it could take days to get liquidity for individual bonds when it came to individual Muni and/or corporate issues unless if we wanted to take massive haircuts. 

 

Funds/ETFs will only have liquidity issues if the underlying bonds have them first. Outside of treasuries which remained very liquid, it actually seems safer to own the fund/ETF vs the individual bonds given how that has worked historically. 

 

 

[TwoCitiesCapital]

15 hours ago, Sweet said:

Will it return to par though.  Eg.

 

https://finance.yahoo.com/quote/SHY/

 

5 year view.  That should be mean reverting but it’s not.

 

Generally speaking it should behave bo different than the underlying bonds. 

 

In this case, my suspicion is that as 1-2 year bonds rolled down to 0-1 year type bonds, they were probably sold and 3-4 year bonds purchased - all the whole rates kept rising and 3-4 year bonds kept falling in price. This appears to have stabilized over the past year which is what we'd expect with few hikes and the amortization towards par. 

 

We'll likely see the opposite occur in a falling rate cycle. Bonds near par regularly sold to buy more 3-4 years which keep gaining on each subsequent rate cut. 

 

So your ups and downs are amplified by the ETF trying to stay true to its 1-3 year target you basically press-the-bet on 1-3 year bonds instead of allowing them all to to zero. 

 

Perhaps a better proxy for the underlying bonds would be to own a money market AND the 1-3 year fund so you have the spectrum of 0-3 years covered. 

[scorpioncapital]

Some money market etfs you could in theory redeem them from the fund company - like redeeming a bond. But one mm etf I own closed redemptions 1 or 2 years ago and now the secondary market is your only liquidity. I guess MM funds can do this. Maybe something to look at the terms of if you can sell it back to the company or only sell on secondary market?

[Sweet]

9 hours ago, TwoCitiesCapital said:

 

Generally speaking it should behave bo different than the underlying bonds. 

 

In this case, my suspicion is that as 1-2 year bonds rolled down to 0-1 year type bonds, they were probably sold and 3-4 year bonds purchased - all the whole rates kept rising and 3-4 year bonds kept falling in price. This appears to have stabilized over the past year which is what we'd expect with few hikes and the amortization towards par. 

 

We'll likely see the opposite occur in a falling rate cycle. Bonds near par regularly sold to buy more 3-4 years which keep gaining on each subsequent rate cut. 

 

So your ups and downs are amplified by the ETF trying to stay true to its 1-3 year target you basically press-the-bet on 1-3 year bonds instead of allowing them all to to zero. 

 

Perhaps a better proxy for the underlying bonds would be to own a money market AND the 1-3 year fund so you have the spectrum of 0-3 years covered. 

The vanguard fund posted above and the really short term fund both tracked well.  It’s the longer dates ones that seems to deviate in price.  Maybe these correct as you say overtime.