SGOV: A Smart Choice For Value Investors Now

seekingalpha06-22

rrodrickbeilerIt may seem contradictory at first, but the position in treasury bills seems very attractive to value investors. This sentiment is derived from a mix of good returns for their cash and a...

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This sentiment is derived from a mix of good returns for their cash and a...</p>\n\n<a href=\"https://seekingalpha.com/article/4700390-sgov-smart-choice-for-value-investors-now\">Source Link</a>\n\n</div>\n","source":"seekingalpha_fund","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>SGOV: A Smart Choice For Value Investors Now</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nSGOV: A Smart Choice For Value Investors Now\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-06-22 00:15 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4700390-sgov-smart-choice-for-value-investors-now><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>rrodrickbeilerIt may seem contradictory at first, but the position in treasury bills seems very attractive to value investors. This sentiment is derived from a mix of good returns for their cash and a...</p>\n\n<a href=\"https://seekingalpha.com/article/4700390-sgov-smart-choice-for-value-investors-now\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"SPY.AU","symbol_name":"SPDR® S&P 500® ETF Trust","start_time":0,"source_url":"https://seekingalpha.com/article/4700390-sgov-smart-choice-for-value-investors-now","article_id":"2445767047","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/96228790/image_96228790.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2445767047","pubTimestamp":1718986512,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"rrodrickbeilerIt may seem contradictory at first, but the position in treasury bills seems very attractive to value investors. 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This sentiment is derived from a mix of good returns for their cash and a lower level of attraction for the main companies in the indices today. That's why I believe that even those who don't follow the classic 60/40 allocation (60% in equities and 40% in fixed income) can benefit from having cash that yields over 5% a year and still allows them to capture movements in the stock market tactically without exposing themselves to the volatility of longer curves. Even so, the main risk of iShares 0-3 Month Treasury Bond ETF (SGOV) and the like is becoming increasingly latent, which is the opportunity cost, evidenced by a buoyant economy and tech stocks that have advanced significantly in recent months. SGOV is Very Attractive Right Now  I chose the SGOV ETF for a few reasons. Among them are its exposure to the shorter maturity end of US Treasuries, its net expense ratio of 0.07%, and being an iShares ETF (BlackRock (BLK)). But it's worth mentioning that several other positions fulfill the role I'll be discussing throughout this article, including BIL, whose main difference is that it is exposed to 1-3 month bonds instead of 0-3 months, which is the case with SGOV, iShares Short Treasury Bond ETF (SHV), which is exposed to bonds shorter than 1 year and iShares 1-3 Year Treasury Bond ETF (SHY), which has a maturity of 1-3 years. As tacticality and lower volatility play a central role here, I believe that SGOV fulfills this objective well since its maturity is shorter, but it still allows you to achieve very satisfactory returns, without exposing yourself too much to mark-to-market and mitigating possible negative surprises. Looking at SGOV's Average Yield to Maturity, we have the figure of 5.31% (June 18), a level that I consider extremely attractive. With LTM inflation at 3.3%, the investor is not only able to replace inflation through his cash, but also have a real interest rate of 2%, and that's without considering that inflation could eventually converge on the Federal Reserve's target (which is 2%), which, ceteris paribus, would increase this figure. Of course, if the landscape improves and becomes clearer, this rate should also fall, and as the exposure is to short bonds, the yield will also fall in a few months. In the latest FOMC statement, the Federal Funds Rates were maintained, and the main reason is still inflation, which although it has fallen still has risks that must be monitored, making the committee feel uncomfortable about having started the cuts. I would highlight two passages that I think are very important from this statement: 1. \"The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.\" and 2. \"Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably towards 2 percent.\". Therefore, it’s probable that there will still be a delay in cutting interest rates, and when this factor stops being emphasized, that's when the Fed will start cutting rates. Most of the market now believes that there will only be one cut by the end of 2024. But as already mentioned, the main role of SGOV is not to earn from interest rate forecasting/mark to market (MTM), since if it were to do so, it would be better to expose itself to a longer duration asset. Below, you can see that the current interest rate that SGOV is exposed to is much higher than the average of the last decade. The last time we saw a rate for the world's best risk-free asset was before the subprime crisis.   TrendSpiderThis alone would make ETFs that are exposed to this type of security very attractive and difficult to ignore. Stock indices remain a structural play Conversely, setting this type of asset aside is influenced not just by the investor's philosophy but also by current market momentum. YTD, the S&P 500 has risen over 15%, the QQQ has surged nearly 20%, and other individual (mostly tech) stocks such as Nvidia (NVDA) have seen gains exceeding 100%. This becomes a clear opportunity cost: why would anyone expose themselves to an asset with a yield of close to 5% a year when the stock market is still buoyant and with strong expectations of earnings growth? As a value investor, the price of these assets matters. Even though these assets continue being secular and are structurally important in any portfolio, I'm not sure that today it's ideal to have 100% in stocks. The biggest names in these indices, such as Microsoft (MSFT), Nvidia, Apple (AAPL), and Amazon (AMZN), certainly deserve a premium on their valuation and should continue to be standouts in their markets, with exceptional business models, lots of cash on hand and strong cash generation. This is the main feature that makes me think that the U.S. stock market is not that expensive. When we look at forward price-to-earnings, the Nasdaq (QQQ) is trading at around 28x, while its average over the last decade is 23x. The S&P 500 (SPY) is similar, with its average being ~19x and currently trading at 22x. In other words, it's possible to infer that both are trading slightly above their average over the last 10 years. It seems very plausible that both indices are trading at a certain premium considering the importance of these companies today, not only in trends and the global economy but also in the weights of these indices. Nvidia and Microsoft account for more than 14% of the S&P500 combined, while Apple and Microsoft account for more than 16.5% of the QQQ (not counting Nvidia, which has more than 7.5% on its own). The premium on these compositions in relation to the market and their historical average doesn't seem too high.   KoyfinAnother factor that corroborates this momentum is seasonality. Over the last 10 years, July has been one of the strongest months for the S&P 500, advancing 90% of the time with an average return of 3.2%. This is even more significant for the QQQ, which has advanced in July 100% of the time over the last 10 years and with an average return of 4.87%. TrendSpiderEven with all this attractiveness, a margin of safety is of paramount importance for the long term. Narratives of strong growth may not only sustain higher stock price growth, but may materialize in profits and reduce this multiple, but even so, I welcome caution in increasing exposure to these assets whose expectations are already very high. Through DCFs, for companies like Apple to be at their fair price, optimistic assumptions are needed, such as growth of more than 15% for the next 10 years and even discounting this flow by around 8%. This shows that part of the market's gains are sustained by narratives and stories, whose expectations may not come true exactly. So, it seems that fixed income deserves a place in the portfolio. Of course, it will depend on the investor's philosophy, whether it's the more traditional 60/40 or something more aggressive. One possibility that I see as attractive is to go easy on the monthly additions to equities, reinforcing the cash while there is no large margin of safety in these assets and the free risk rate is still high. SGOV and Similars Can Be Used For Tactical Moves Based on the above factors and other characteristics of the current moment, I could make a prediction of a correction in the stock markets: Optimism is high (although it's not a bubble); The market cap of the 5 largest companies in the S&P500 is more than 24%; Job Openings are declining and this usually indicates a recession and; Interest rates are high and should be restrictive. But I don't assume this prediction to be true. As Howard Marks says, “Macro forecasting can be worse than neutral in its effect, it can be damaging in its effect”. The cost of not being invested in the American stock market may be too high, to paraphrase Peter Lynch this time, Far more money has been lost in waiting for corrections than in the corrections themselves. But in any case, corrections will happen eventually, even if no one can predict them. And that goes hand in hand with the lack of opportunities in today's market. For some time now, Berkshire Hathaway (BRK.B) hasn't found any great opportunities in the market except for one or two like Chubb (CB) and that's why Buffett's company owns more than 3% of the entire Treasury Bill Market. And that's where the importance of having cash with liquidity comes in. Currently, investors are paid a yield of more than 5% a year, practically risk-free, just to wait, more specifically, to wait to find an asset that is worth the reduction in this cash position, which can eventually happen with corrections in the whole market or specific opportunities. To illustrate, a few months ago, the narrative that Apple was lagging behind in the AI race caused the stock to underperform its peers, i.e. even with all this AI trend, it was possible to buy Apple shares for $165 in April, and a few months later, that margin of safety became much narrower, with the shares reaching $216. Reinforcing the Risks As already mentioned, the main risk here is opportunity cost. Even with an attractive yield at the moment - of more than 5% - there are dozens of stocks with incredible earnings projections, with many already showing a free cash flow yield above this level, and also with the so-called \"upside risk\", which is certainly not the focus of a short-term US Treasury bond ETF. Although SGOV's very short-term securities have lower volatility compared to longer-term securities, it still exists. In some scenarios, such as a rapid rise in interest rates rather than cuts, this ETF could initially suffer from MTM and show a certain devaluation. Also because it is in the shortest bonds, profitability is at the mercy of current interest rates. When bonds (which currently have good yields) mature, the ETF needs to reinvest the funds in new ones, even if these rates are less attractive, reducing the investor's gain. In other words, volatility and risk are lower than for longer bonds, but so is predictability, as well as possible MTM gains in dovish scenarios. Finally, there is the very remote risk of default, which is practically left aside because these bonds are among the lowest-risk assets in the world. Even in a scenario where US debt already exceeds $34 trillion, US Treasury bonds are considered risk-free. But in a normalized scenario, these risks are much lower than the opportunity cost, since it is necessary to get the weight of fixed income right in the portfolio so that exposure makes sense and does not jeopardize the total return. Not only that but when necessary, the investor needs to know and be able to reduce this cash position in order to invest in more attractively priced stocks. Final Thoughts  In short, SGOV (i.e. cash) allows the value investor to increase exposure to attractive assets when the time comes. This, coupled with high interest rates, makes the asset even more attractive at the moment. It's hard to escape the FOMO of seeing the market go up a lot and having a relevant cash position, but using the right dosage, having the necessary liquidity is useful for value investing strategies.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2445767047"}