Put cash to work with short-term bond ETFs

• Investors interested in putting idle cash to work may consider short-term bond ETFs.
• High yields on cash alternatives, such as money market funds, should decline when the US Federal Reserve begins to reduce interest rates.
• Short duration bond ETFs can potentially add more income in an environment of declining interest rates.

Looking to get more out of your cash? Consider short-term bonds, which are currently offering some of the highest yields in the past 15 years.¹ Investors may be able to invest in short-term bonds with ETFs to potentially earn more income with cash they don’t need in the near future.

Americans are sitting on over $17.5 trillion in bank deposits with an additional $6 trillion in money market funds.² An investment in fixed income funds is not equivalent to and involves risks not associated with an investment in cash or cash equivalents. That said, historically, longer term bonds have tended to outperform cash when interest rates are decreasing, as is expected to occur later this year if the Fed pivots to cutting rates.³

Today’s market may provide opportunities to step out of cash. The Fed funds rate of 5.25-5.5% is currently greater than inflation, which is 3.2% using February’s Consumer Price Index.⁴ We believe the Federal Reserve may be close to reducing interest rates and the market is pricing in multiple interest rate cuts by the end of 2024.⁵ During the 2001-2002 rate cut cycle, money market fund 12 month returns fell from 5.8% in March 2001 to 2.6% by March 2002 and down to 1.8% by July 2002.⁶ Bonds can potentially provide both income and capital appreciation and may outperform cash if short-term yields decline.

Investors interested in putting idle cash to work may consider these short-term bond ETFs:

• The iShares Treasury Floating Rate Bond ETF (TFLO) invests in floating-rate U.S. Treasury bonds, whose interest payments adjust to reflect changes in interest rates.
• The BlackRock Ultra-Short Term Bond ETF (ICSH) seeks higher income and capital preservation by investing in commercial paper, short-term bonds, certificates of deposit and other ultra-short-term instruments with a duration or average life of less than one year.
• The BlackRock Short Duration Bond ETF (NEAR) seeks higher income by investing in short-term bonds with a duration of three years or less.

Historically, bonds have served as a way for individuals and institutions to invest idle cash. The other main roles of fixed income investments are:

• Boost income potential: Rather than rely solely on capital appreciation to grow your portfolio, bonds can help provide regular income as an important source of return. Even U.S. Treasury bonds are now yielding 4-5%, investment grade corporates 5-6% and high yield or emerging markets bonds 6-8%.⁷ This income can potentially be a consistent source of returns for portfolios.
• Equity market diversification: During rising rate environments, the goal of the Fed is to reduce inflation and one option to do so is raising interest rates, but rate hikes may trigger a recession or a stock market downturn. Bonds have generally tended to outperform when stocks decline,⁸ since they pay a contractual rate of interest and a flight-to-quality may occur — meaning investors turn to less risky investments and cause the prices of Treasury bonds to increase (a bond’s price moves in the opposite direction of its yield).

Stepping out of cash and into the world of bond investing doesn’t have to be intimidating. Whether you are an experienced investor or reallocating to fixed income, the BlackRock Bond Pyramid shown above can help you think through the role of bonds. This framework articulates the purpose of bonds and can help you align your goals with bond investments. iShares bond ETFs offer 125 funds to help investors pursue their fixed income goals and objectives.