After nearly two years of zero rates in the front end of the curve, the rise in treasury yields has finally brought back the attractiveness of cash parking instruments like the Schwab Strategic Trust – Schwab Short-Term U.S. Treasury ETF (NYSEARCA:SCHO). The fund now exhibits a 30-day SEC yield of 2.41%, and given its low duration of 1.9 years it will absorb any incremental front end moves with a more stable NAV.
Until this point in time it was more effective and less risky to just keep cash as such rather than utilize a cash parking vehicle such as short term treasuries ETFs or short duration corporate bonds ETFs. The violent shift up in the yield curve has finally brought back attractive 30-day SEC yields to these instruments, and their low duration will ensure a greater NAV stability going forward even if the curve moves slightly higher in the short term.
An investor can either choose to park spare funds in a vehicle such as SCHO, or take a more active management approach and buy treasury notes and bills outright via their brokerage accounts.
Interest Rate Environment
2-year yields are nearing highs not seen in over a decade:
Some banks are now even penciling in Fed Funds rates close to 4%:
The fund is composed entirely of treasuries:
The portfolio duration and weighted average maturity are very short:
This means that the NAV of the fund is more stable than longer duration funds and the roll effect takes place faster – as bonds mature, the fund is able to buy market yielding treasuries, thus providing NAV stability. The ETF has no credit risk since the entire portfolio is composed of government guaranteed securities.
As a retail investor you can choose to just buy via your brokerage account short-dated Treasury instruments outright and just roll them. This way of parking cash is advantageous from the standpoint of no management fees paid but it requires active management (i.e. following maturity dates, utilizing brokerage platforms to buy new term securities, etc.).
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