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January 30, 2006

Treasury ETF's vs. Money Market Funds, Mon., Jan. 30, 2006, 9:21 AM

At 8:34am ET I received the kind of letter that shows my blog is making a difference.

"Bill, .... I am a retired business owner who does self-investing with lot of ETFs. I am trying to comprehend (because it may revolutionize how an individual handles investing in CDs and Money Market short-term funds): For short-term parked lump sum funds (say one year), why not just buy Treasury ETF's which pay as good or better yields as CD/MM rates, without the hype & hassle. (SHY; TIP; TLT; IEF).

Thru my $8/trade Fidelity brokerage/MM acct., quick liquidity is not a problem since I can sell ETFs to generate the $$$ I need, when I need, -vs- tie up in a CD for 6+months at lower MM rates. TLT (20 yr) yield at 4.97% current.... What difference does it make to me if it's 20 yrs if I can sell the ETF anytime? {20 year bonds with only a 5 day ETF sale settlement time.} The ETFs could fluctuate slightly in value <-vs- CD or MM> but I don't think (that's) a lot of risk.

/Doug"

Doug, money market funds (MMF) are professionally managed, and typically also come with advice of a personal financial advisor. Often a trader needs that advice.

But, as I see it, a MMF is a savings tool, which is a different asset class. I see them like retail commercial bank savings accounts. On the other hand, an ETF represents a securities trading instrument, which is what traders need.

I believe that index tracking ETF's are far superior to at least 95 pct of the managed funds available to the public. For example, a Treasury ETF is in my view a superior product because, as you indicate, the costs are less and the liquidity greater.

But under the control of a bad trader, any ETF can produce inferior results.

By holding an ETF, what you are in effect saying is that you believe that net-net you can produce portfolio results that are superior to professional traders who actively manage the comparable mutual fund products.

For many people that's a stretch. But since about 80 pct of professionally managed funds under-perform the broad market indexes, I agree you have a good shot.

If you are successful at trading other ETF's I see no reason you ought not to be using Treasury ETF's as a replacement for your MMF's.

Cordially,

/Bill

Please read g034's comments below. They are appropriate for the majority of traders.

Posted by Posted by Bill Cara on January 30, 2006 09:22:10 AM | Category: Trader Tools

Discourse

Maybe I'm missing something, but in one year TLT could easily lose more than 5% and is NOT worth the risk vs. a money market fund (there is risk in SHY also). TLT is down 0.18% TODAY. That is the spread between the yield of TLT and buying 6 mo. paper.

Why don't you just ladder out T-Bills? Then you have a maturity date which ETF's don't have.

Also, you can get 4% with a money market fund that has a higher minimum, with full liquidity.

Trying to squeeze the extra few basis points in yield is not worth the downside risk, IMO.

Posted by: g034 [TypeKey Profile Page] at January 30, 2006 10:07 AM [link]

The ETF's are a very convenient liquid way to trade the yield curve. As an alternative to individual bonds and bond funds they are preferable for my purposes. Active management is important.

As an asset class bonds may compliment or hedge what one does in other areas. Correlations should be considered within your individual portfolio.

They are not a money market and inappropriate as a cash alternative in my opinion.

Consider that the TLT traded at 97.5 in 6/2003 and fell to 81 within 60 days. After a 16.5% decline I doubt the yield would be much comfort.

Posted by: stockman [TypeKey Profile Page] at January 30, 2006 12:11 PM [link]