If Cash Is King, This Is Its Queen
Listen to this post
“Cash is trash,” say the growth-minded and optimistic, who believe buying stocks is the only winning move… and holding cash is just as good as missing out.
But these days, high inflation and falling stock prices are challenging both assumptions.
If cash is king, why did it lose 9% of its value in a year? And if cash is trash, why was it still one of the best performing assets of the 2022 bear market?
As is often the case in life, both extremes have it wrong. And there’s a simple solution here I’m willing to bet you’ve never heard of.
Here’s my take…
Cash is indeed king. But there can be no king… indeed, no kingdom…without a queen.
I’ll show you exactly who this “queen” is today… and how it can provide the best of both worlds: inflation-beating yield and convenient liquidity, all without leaving your trading account.
Secure Your Cash KingdomWhen the Federal Reserve started raising interest rates to 40-year highs, the prospect of earning needle-moving yield on your idle cash became quickly apparent.
Right now, the 3-month Treasury bill sports an annual yield of 5.32%. That means if you held $10,000 in this bill reinvested each quarter for a year, you’d receive four interest payments totaling $530.20.
Cash is king, but yield is its queen. Cash without yield is a slow but sure wealth-killer, especially in times of high inflation… And yield without cash almost always presents higher risk — you need to buy a stock that pays a dividend, or a corporate bond, to get it.
Viewed this way, having strong yield on your risk-free cash is a match made in heaven.
So, since Treasurys are “risk-free yield” (I’ll address these sneer quotes another time)… we should buy them, right?
Yes… sort of.
First off, have you ever actually tried buying a Treasury bill?
If you’re going to buy from the Fed, the only place that can guarantee the phrase “risk-free,” it’s not exactly convenient.
First you have to open an account on the TreasuryDirect website… which feels like it was designed with the threat of Y2K in mind.
Then you connect your bank account… navigate a confusing list of Treasury auctions to make a purchase… wait for it to clear… wrestle with archaic passwords and email codes… wait two business days after your purchase to start earning yield… and on and on.
Point is, it’s a hassle to set this up. You can’t even use your browser’s “Back” button or the website breaks. Seriously.
But compared to the real downside, these are all minor annoyances.
Imagine you face a family emergency and need funds ASAP. Or less seriously… imagine stocks drop 20% and you want to take advantage of better prices.
Well, holding Treasury bills with the Fed means you’re going to have to wait at least 45 days before you can move them… which you have to do before you can sell them.
And if you need to sell your Treasurys early, you may see a capital loss… and doing so, in some cases, requires filling out a form and physically mailing it before you can get your funds.
Don’t get me wrong, TreasuryDirect is a solid place for long-term savings. But it’s a terrible place for liquid trading capital.
Fortunately, there exists a four-letter ticker that offers most of the benefits of short-term Treasurys with none of the hassle…
The Trader’s T-BillI’m talking about the iShares 0-3 Month Treasury Bond ETF (SGOV).
This ETF invests in short-term Treasury bills and returns the proceeds to shareholders as a monthly dividend payment.
That means, instead of buying T-bills, you can simply hold this stock in your brokerage account with your idle cash… receive monthly dividends depending on how many shares you hold… and whenever you need the cash, simply sell SGOV and put your capital to work.
The yield on SGOV is just a hair under 5%, so you’re giving up a chunk of yield to use it. However, that yield is still higher than inflation… and the fund’s expense ratio of 0.13% is among the lowest in its class.
Bear in mind, the chart of SGOV is a little odd. The capital gains appreciated throughout the month are effectively “reset” by the distribution. But this is one to buy and hold, not really trade.
All this said, SGOV is not the “risk-free rate” you would get from buying at the Fed. It’s a security, and comes with a whole different set of assurance because of that. It’s probably 99.99% risk-free… but an element of risk remains.
If you’re sitting on a bunch of cash in your trading account and looking for an all-but-risk-free place to put it, I don’t think you can do better than SGOV. (If you can, and want to look smarter than me, write me at [email protected] and I’ll look to share your idea with your fellow readers.)
Editor, TradeSmith Daily