Ultra short term bond ETF comparison - saving account alternative

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guyinlaw
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Ultra short term bond ETF comparison - saving account alternative

Post by guyinlaw »

Below is the comparison I did on Ultra short term bond ETFs. I do not have access to Vanguard money market fund. I have to keep money Merrill Edge/Bank of America for a few years, that limits other options.

I have my cash reserve in SHV, ICSH, VCSH and cash. (around 40%, 20%, 15%, 25%). Cash reserve is for emergency etc..

How would you invest your cash in my situation? As interest rates drop in treasury, would this change? Thank you.


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VGSH Vanguard Short-Term Treasury Index ETF
VCSH Vanguard Short-Term Corporate Bond Index ETF
SHV iShares Short Treasury Bond ETF
MEAR iShares Short Maturity Municipal Bond ETF
ICSH iShares Ultra Short-Term Bond ETF
GSY Invesco Ultra Short Duration ETF
Time is your friend; impulse is your enemy. - John C. Bogle
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vineviz
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Re: Ultra short term bond ETF comparison - saving account alternative

Post by vineviz »

guyinlaw wrote: Tue Jul 16, 2019 10:01 am Below is the comparison I did on Ultra short term bond ETFs. I do not have access to Vanguard money market fund. I have to keep money Merrill Edge/Bank of America for a few years, that limits other options.

I have my cash reserve in SHV, ICSH, VCSH and cash. (around 40%, 20%, 15%, 25%). Cash reserve is for emergency etc..

How would you invest your cash in my situation? As interest rates drop in treasury, would this change? Thank you.
As a reserve account which is genuinely an emergency fund and is managed separately, my view is that such a fund should contain 20% to 30% in equities. Emergency funds can remain unused for years on end, losing purchasing power due to inflation if held entirely in very short duration bonds or cash. 25% in VT (Vanguard Total World Stock ETF), 50% in VGIT (Vanguard Intermediate-Term Treasury ETF), and 25% in GSY (Invesco Ultra Short Duration ETF) is probably how I would proceed.

Such an allocation would historically have not produced a rolling 1-year loss of more than about 5% or a maximum drawdown over 12%. Unless you can predict the size of your future "emergency" within 5-10% AND you'd have no resources left after using all of the emergency fund, to me it makes sense to simply increase the size of the EF slightly and invest it appropriately.

For the past 15 or 20 years I've been using Vanguard Target Retirement 2035 Fund (VTTHX) in my taxable account as an "emergency" fund. Despite having taken withdrawals occasionally for unexpected expenses, the nominal value is higher now than when I started. This is a more aggressive approach than I'd recommend to others (we have plenty of additional resources, with varying degrees of liquidity, beyond the emergency fund we could tap into if needed).

In any case, I see no reason to hold four different bond funds in an emergency fund: it strikes me as unnecessarily complicated with no real marginal benefit. Assuming your cash accounts (i.e. checking & savings) have enough buffer for normal month-to-month variation, if you wanted to stick with bond funds I'd look at something like 30% GSY and 70% Vanguard Intermediate-Term Bond ETF (BIV).

Unlike your current allocation, which has lost 7% in purchasing power over the past 10 years, the GSY/BIV allocation would have gained 17% in purchasing power.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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welderwannabe
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Re: Ultra short term bond ETF comparison - saving account alternative

Post by welderwannabe »

vineviz wrote: Tue Jul 16, 2019 11:57 am As a reserve account which is genuinely an emergency fund and is managed separately, my view is that such a fund should contain 20% to 30% in equities. Emergency funds can remain unused for years on end, losing purchasing power due to inflation if held entirely in very short duration bonds or cash.
Thats a really interesting idea. I have kept mine in cash. You got be considering a small allocation to equities.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.
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vineviz
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Re: Ultra short term bond ETF comparison - saving account alternative

Post by vineviz »

welderwannabe wrote: Tue Jul 16, 2019 12:22 pm
vineviz wrote: Tue Jul 16, 2019 11:57 am As a reserve account which is genuinely an emergency fund and is managed separately, my view is that such a fund should contain 20% to 30% in equities. Emergency funds can remain unused for years on end, losing purchasing power due to inflation if held entirely in very short duration bonds or cash.
Thats a really interesting idea. I have kept mine in cash. You got be considering a small allocation to equities.
Everyone treats their emergency funds a little differently, but let's say the primary role of those funds is to provide income in the case of job loss.

The probability of any particular person losing their job in any particular year will vary wildly (depending on their role, industry, skill, education, etc.) but let's say it's about 6%, which is higher than average.

So, based on this, on average you expect the emergency fund to be used about every 8 years. You might use some of it more frequently, but let's say this is the average time to depletion.

Invested completely in cash, it's very possible for the emergency fund to lose value in inflation-adjusted dollars. This has been the case from 2001 to present, for instance.

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But a very conservative portfolio of 25% S&P 500 and 75% Vanguard Short-Term Treasury Fund (VFISX) consistently had real growth over this period, with a maximum drawdown of 9.2% and a minimum rolling one-year return of -4.25%. This is even with several major market downturns (e.g. Russian debt default, the dotcom crash, and the subprime crisis), and starting from 1995 you'd never have been better off in cash than in a 25/75 balanced allocation.

Except for investors right at the edge of solvency, most investors would be much better off IMHO over-funding their emergency fund by 5 to 10% (to protect against the possibility market decline in the first year) and then to invest as they normally would invest for a 5-10 year time horizon. Over that period, a portfolio of 15-25% stocks has a LOWER expected drawdown in real terms than a portfolio that is 100% in cash or short-term bonds.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
joe-kr
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Re: Ultra short term bond ETF comparison - saving account alternative

Post by joe-kr »

I’m in the same boat using Merrill with no good MM option. I tried what you are doing, but the important thing to look at is that “max drawdown”. One of the etf’s I used in the past was FLOT. It looked stable and had a higher yield. But, if you look at the 1 year chart, you will see the strange drop back in Dec. Yes, it came back, but even that relatively small drop is not what I was looking for.

Anyway, look at the holdings of these etf’s. I think the best to replicate a MM is SHV, because it’s all Treasury and cash holdings. Many others hold corporate debt, some BBB grade, etc.
bck63
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Re: Ultra short term bond ETF comparison - saving account alternative

Post by bck63 »

vineviz wrote: Tue Jul 16, 2019 11:57 amquote=guyinlaw post_id=4644900 time=1563289277 user_id=149872]
As a reserve account which is genuinely an emergency fund and is managed separately, my view is that such a fund should contain 20% to 30% in equities. Emergency funds can remain unused for years on end, losing purchasing power due to inflation if held entirely in very short duration bonds or cash.
+1. I use FIKFX (Fidelity Freedom Index Income Fund) for my emergency fund, which is 20% stocks.
Lastrun
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Re: Ultra short term bond ETF comparison - saving account alternative

Post by Lastrun »

joe-kr wrote: Tue Jul 16, 2019 4:21 pm I’m in the same boat using Merrill with no good MM option.

I think the best to replicate a MM is SHV, because it’s all Treasury and cash holdings. Many others hold corporate debt, some BBB grade, etc.
+1

I looked at this hard as well for ME/BofA. I also ditto Vineviz’s approach to juice the return a little with 20% or so in something with a little more risk. I ended up with 80% SHV and 20% GSY. Honestly, i copied this from Betterment, they have a smart saver account that is a SHV/NEAR combo around the same percentages. You could play around with an ultra short treasury fund like SHV, BIL or GBIL and combine it with something else with more risk, including a total stock fund, and get to a comfortable place. Don’t agonize too much.
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