ETFs may offer 10 times your cash sweep
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The Muscular Portfolios NewsletterNo. 10 Sept. 11, 2018
Preorder at our home pageBook ships this month

Our book, Muscular Portfolios, is now expected to ship from and other sites between Sept. 25 and Oct. 2, 2018. (The booksellers may still show the original pub date of "Oct. 9," but the press run is ahead of schedule!)

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"I know of no book for a general investment audience that is more thoroughly researched and backed up by hard data."
MARK HULBERT, founder of the Hulbert Financial Digest

This is the first monthly newsletter

In the past three years, as the book Muscular Portfolios has been in development, we've published nine beta-test newsletters, several months apart. Today's newsletter is the first regular monthly issue. Thanks for supporting our research along the way!

For a description of how Muscular Portfolios work, see our May 2, 2016, newsletter.
Get up to 10 times more yield on your cash

Brian LivingstonBy Brian Livingston

Interest rates are rising, but brokerage firms are taking their sweet time giving you higher yields in their "cash sweep accounts." If you sell a stock or a fund — and you don't immediately reinvest the cash into an interest-bearing security — you may be losing 90% of the yield you could be enjoying.

Exchange-traded funds (ETFs) that hold short-term instruments, such as 1-to-12-month investment-grade corporate paper and Treasury bills, offer yields up to 1.9% these days.

But brokerage sweep accounts — which you might not even know your cash was swept into — are giving you as little as one-tenth of that, according to a Wall Street Journal column by Jason Zweig (Figure 1).
Brokerage cash-sweep accounts
Figure 1. You may be able to get 10 times a sweep yield in a cash-like ETF. Sources: Federal Reserve Board (effective short-term Fed funds interest rate) and Crane Data (yields of money-market funds and sweep accounts). Credit: Jason Zweig, Wall Street Journal.
"Investors with sweep accounts at the brokerage division of LPL Financial Holdings earn 0.16% on a $250,000 balance. LPL, meanwhile, is making roughly 1.85% on its customers' cash," Zweig writes. "Cash sweeps contributed 25% of LPL's total gross profit in the second quarter, nearly as much as LPL's commission and advisory fees combined."

You may want more gain when you’re in cash for a while
To be sure, Muscular Portfolios — such as the ones in my forthcoming book — do not use market timing. Therefore, they never switch to 100% in cash. When the S&P 500 begins a bear market, a Muscular Portfolio will gradually rotate out of stocks and into short-term bonds and alternative investments, not 100% into low-yielding cash. (Download my free special report at the end of this newsletter for an explanation of Muscular Portfolios.)

But there are valid reasons why you might hold cash in your account for more than a few days:

Saving up for a one-time expense. Say you're accumulating a first-home down payment or salting away money for an IRS tax bill. You may want to hold some interest-bearing cash so your hard-earned savings can't go down.

Ultraconservative liquidity. Some investors like the feeling of having one or two years' worth of living expenses in cash. It reassures them that they can meet their monthly bills without selling stocks during a down market (although the irrationally large cash allocation seriously harms such an investor's performance).
How to pump up the yield on your cash

Whenever you sell any stock or fund to raise cash — and you're not planning to buy a different security right away — check the interest rates of your brokerage's sweep account vs. the cash-like ETFs shown below.

If the difference in dollars is more than the commission your brokerage firm charges, buy shares of the ETF instead of letting your cash sit in a sweep account.

The following three ETFs are typical of different categories of interest-bearing, cash-like securities. All yields/dividends shown are as of Sept. 7, 2018, according to Each category links to an extensive directory at that site.

SHORT-TERM INVESTMENT-GRADE (IG) CORPORATE PAPER. ETFs such as these hold ultrasafe, interest-bearing securities from corporations with above-average credit ratings:

   1.87% yield — ICSH: iShares Ultra Short-Term Bond ETF (annual fee: 0.08%)

TREASURY BILLS. ETFs in this category hold the safest possible US government obligations with maturity dates only 1 to 3 months away:

   1.29% yield — SHV: iShares Short-Term Treasury Bond ETF (annual fee: 0.15%)

TAX-FREE MUNICIPAL BONDS. These ETFs offer much lower yields but may appeal to high-net-worth individuals who wish to avoid tax liabilities:

   0.91% yield — PVI: Invesco VRDO Tax-Free Weekly ETF (annual fee 0.25%)

To be sure, you can seek higher yields by purchasing ETFs that hold junk bonds or IG corporate bonds with longer maturities. But ETFs that own bonds maturing in two, three, or more years have a nasty habit of going down in price when interest rates rise.

For example, SHV's sister fund — SHY, the iShares 1–3 Year Treasury Bond ETF — fell more than 2.2% in less than three months from Mar. 17 to June 12, 2008. That's not very cash-like. For true stability, you want securities that mature in less than one year, even though those debt obligations pay lower yields.

Cash-like ETFs are not precisely the same as money-market mutual funds, which have a fixed, $1 share price. Short-term ETF prices may go up and down a few cents during the trading day, but they will always end up with a gradual rise in value over longer periods.

Note for investors who like all-Vanguard portfolios: Because cash-like ETFs are not very profitable in a low-rate environment — and Vanguard is newer to the ETF game than some other providers — Vanguard does not at the present time offer a cash-like ETF with maturities of less than 12 months.

Vanguard's money-market mutual fund, VMMXX, has an ultrasafe average maturity of 30 to 60 days. However, VMMXX requires a minimum investment of $3,000. ETFs impose no minimums. VMMXX also charges an annual fee of 0.16%, notably higher than the 0.08% fee of ICSH, shown above.

Conclusion: If you truly need to hold cash in your portfolio for any length of time, you can do better with any of the above cash-like ETFs than the sweep accounts at most brokerage firms.
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About the author: Brian Livingston is a successful dot-com entrepreneur, an award-winning business and financial journalist, and the author of Muscular Portfolios (BenBella Books). He is also the author or co-author of 11 books in the Windows Secrets series, 1991–2007 (John Wiley & Sons), with over 2.5 million copies sold. From 1986 to 1991, he worked in New York City as the assistant IT manager of UBS Securities; as a consultant for Morgan Guaranty Trust (now JPMorgan Chase); and as technology adviser for Lazard Frères (now Lazard Ltd.). He was the weekly Windows columnist for InfoWorld magazine from 1991 to 2003. During portions of that period, he was also a contributing editor of CNET, PC World, eWeek, PC/Computing, Datamation, and Windows magazine. In 2003, he founded the Windows Secrets Newsletter, which grew from zero to 400,000 email subscribers. He served as its editorial director until he sold the business in 2010. He is currently president of the Seattle regional chapter of the American Association of Individual Investors (AAII).

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