SHV: 2 Ways To Beat The Cash Parking 5.1% Yield

seekingalpha07-22

iShares Short Treasury Bond ETF holds treasury securities maturing in a year or less, tracking the ICE Short US Treasury Securities Index.With a 5.07% yield and minimal duration and credit risk, SHV ...

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Dragon Claws/iStock via Getty Images iShares Short Treasury Bond ETF (NASDAQ:SHV) holds a portfolio of treasury securities maturing in a year or less. This fund is a passive vehicle that chooses at least 80% of its portfolio from the ICE Short US Treasury Securities Index. The index incumbents are chosen using the representative sampling methodology, which as noted in SHV's prospectus involves \"investing in a representative sample of securities that collectively has an investment profile similar to that of an applicable underlying index\". The ETF has around $19.2 billion in net assets at last count, and its portfolio is made up of a little over 40 securities (all T-Bills) and cash. SHV In contrast, the benchmark index of this fund holds around 100 securities. The difference in the size and scale between the ETF and the index prevents the former from attempting to replicate the latter. The representative sampling method, however, has served this ETF well. We can see below that SHV has tracked ICE Short US Treasury Securities Index well over the years, outperforming it in the majority of the timeframes. SHV This feat is particularly impressive considering that the ETF has expenses, whereas the index does not.   SHV Collectively, SHV earns 5.26% on its investments and that is reflected in the average yield to maturity number below. SHV What you get to keep net of expenses is around 5.13% and that is indicated by the 30-Day SEC Yield number. This number takes into account the interest income and expenses of this fund for the most recent 30-day period, spitting out the net earnings for the fund. It is a standard calculation for fixed income funds and is used by investors to compare the recent bottom lines. This number is also a great leading indicator of how much one can expect the ETF to distribute down the line.   SHV We can see from the above data, the distributions are not fixed. They vary depending on the net earnings, which we discussed above. The most recent distribution of 46.6218 cents results in a yield of around 5.07%, based on the current price of $110.38. We can expect a slight uptick in the next few months based on the higher 30 Day SEC Yield at this time. Collectively, the SHV portfolio has a duration risk of 0.27 years, which means it is almost non-existent. SHV Duration risk signifies the extent to which one can expect the value of the security or a portfolio, in this case to rise or fall in reaction to the change in interest rates. The relationship between the two is inverse. The 0.27 years for SHV indicates that the portfolio value would decline by 0.27% in reaction to a sudden 100 basis points increase in corresponding interest rates. The short maturity investments held in SHV afford its investors a respite from worrying about duration risk. Another pacifier for the SHV unitholders is the infinitesimal credit risk, considering the source of the investments. The 5% yield will not quench the FOMO that only investing in AI can these days. However, when coupled with the low duration and credit risk, SHV does make a decent cash parking candidate. Alternatives Cash is cash and the more you step away from that, the higher your risk. But one can make calculated bets while acknowledging that the risk profile is not the same. For example, until their early redemption date, we saw Alliance Resource Partners, L.P.s (ARLP) bonds as equivalent of cash. We suggested their 7.5% yield was too good to pass up considering the company had more cash than debt, a large line of credit and locked in prices on coal guaranteeing an additional one billion of cash flow. So what is something that pays a little extra? 1) PIMCO Enhanced Short Maturity Active Exchange-Traded Fund (MINT) We have covered this fund a few different times, and you can see our previous posts here. At present, the yield to maturity on this one is slightly higher, with an SEC yield at 5.35%. The company takes the most marginal of credit risks, and the weighted average duration is also on the low side. The duration is slightly more than that of SHV, so if we do have a more aggressive set of interest rate cuts than priced in, MINT will outperform. The fund has done that over the last 1 year as well (outperform) as it played the small credit risks in a nice manner. Data by YCharts 2) Treasury Bills + Cash Secured Puts This is a more interesting combination for those that have parked cash specifically to pick up a security at a low price. Of course, that low price may never happen, so you could be waiting forever. Why not get paid while you wait? The way to do this is to park your cash in individually purchased Treasury bills and then match the maturity (as closely as possible) with a cash secured put. Let's give you an example here. Say you are the equivalent of cuckoo for coco puffs if you had a chance to buy Suncor Energy (SU) at $30.00 per share. Of course, the current price is a bit far from that. But that's ok. If you are looking to buy 1,000 shares of SU at $30.00 per share, you can sell 10 Cash Secured Puts for January 17, 2025 for 38 cents each. Interactive Brokers July 19 2024 You couple that with a 6-month Treasury bill, which yields about 5.23% today. Data by YCharts To that you add your Cash secured yield and voila, you are home with a 7.75% yield just for waiting to buy Suncor.   Author's App Verdict While SHV does what it is supposed to do perfectly, we think there are better ways to get more bang for your buck. We like the two ways stated above. The second one can be really customized to different stocks and different timeframes. While we like these methods, they may not work for everyone. Those wanting the security of Treasuries with full peace of mind can hold SHV.  Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.","kind":"highlight","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/2453885097"}