I have seen a bunch of stories in the media this week (I was quoted in a couple) talking about how investors should deal with low money market yields. The advice was as to be expected—-go into ultra short term bond funds and/or ETFs. These funds typically yield under one percent, but that is better than zero, isn’t it? Maybe or maybe not. First off you need to understand what money market funds are for, typically this is either:
1. Cash that you might need very soon
2. Money that is allocated to cash tactically and could be re positioned any time to stocks or bonds
3. A small amount of cash to facilitate transactions, basically making sure you don’t accidentally overbuy something.
In all of these cases you need easy and free access to your cash. Ultra short term bond funds typically have restrictions on how often you can go in or out and ultra short term ETFs will typically have trading commissions, making neither choice a good substitute for cash.
We make use of ultra short term ETFs in our ETFs, primarily because we use cash tactically and we can buy and sell at institutional commission rates which are insignificant. However, for individual investors these types of funds are typically a poor choice as they are not a substitute for what cash is used for and the yields, while better than zero, are still ridiculous.