Interest Rates Witness Steepest Series Of Increases In Decades, Creating Potential Opportunities In Cash-Like Investments

The world’s central banks have initiated the steepest series of interest-rate increases in decades over the recent two-year period to combat inflation, providing savers with a unique chance to earn higher returns on their idle cash. This period has marked a boon for savers, yielding some of the best returns on cash in recent memory. 

The uncertainty in equity markets and the desire to reduce overall portfolio volatility have made an even more compelling case for maintaining cash holdings. Although the Federal Reserve is likely on the cusp of initiating its first cut to interest rates for this cycle, these factors suggest that the cash trade still has a lot of value. The real question is, where is the best place to park your cash to earn the most without sacrificing liquidity?

The ETF Answer

Interest rates are the highest they've been in decades, so maintaining a cash position may make sense for investors depending on their investment objectives. This could particularly apply to those seeking to mitigate equity market uncertainty, reduce portfolio volatility or meet short-term liquidity needs. For these investors, Exchange-Traded Funds (ETFs) may be an excellent vehicle for cash exposure, as they combine the advantages of liquidity and trading efficiency by allowing investors to adjust their market positions on a whim or access funds without the constraints of lock-up periods. 

This fluidity can be important for reacting to market changes like a broader market downturn or unforeseen liquidity requirements elsewhere in your life. Additionally, ETFs enable investors to tap into various cash and cash-alternative strategies, from money markets to ultra-short-term credit, providing a spectrum of yield opportunities while maintaining a focus on capital preservation. In essence, ETFs may represent a strategic tool for investors aiming to harness the safety and liquidity of cash, tailored to navigate the complexities of the current economic environment.

Advantages Of Ultra-Short-Term Credit

Within the ETF space, ultra-short-term credit is one of the most compelling options for investors aiming to enhance their returns beyond what money market funds traditionally offer, while still preserving the core attributes of cash-like investments. These funds focus on fixed-income instruments with maturities of less than one year to ensure minimal interest rate sensitivity and thus lower risk, akin to cash investments. 

The strategic selection of very short-duration bonds means that ultra-short-term credit can yield higher returns than money market instruments with markedly less volatility compared to longer-duration funds. This balance of modest enhancements to returns with a more controlled risk profile makes ultra-short-term credit an attractive choice for those looking to optimize their cash positions. 

Moreover, it is important to keep in mind that the current interest rate environment is still very favorable to cash-like investments relative to historical rates. This unique combination of features positions ultra-short-term credit as a potentially efficient tool for investors seeking liquidity and yield in a low-risk vehicle.

BMO Cash Alternative ETFs

While interest rates and returns on cash hover at their multi-decade highs, one option investors may want to consider taking advantage of is cash alternative ETFs, like those from BMO ETFs. With a commanding presence in Canada’s ETF market and a robust portfolio of assets, BMO offers an array of fixed-income ETFs designed to cater to various investor needs. The BMO Money Market Fund ETF Series ZMMK and the BMO Ultra Short-Term Bond ETF ZST are two options that offer exposure to high-quality, short-term instruments, blending yield opportunities with capital preservation and liquidity. 

The BMO Money Market Fund ETF Series (ZMMK) targets money market instruments such as treasury bills, bankers’ acceptances and commercial paper, mainly from Canadian issuers. It selects high-quality securities with maturities under 365 days and an average maturity below 90 days, prioritizing capital preservation and liquidity. 

On the other hand, the BMO Ultra Short-Term Bond ETF (ZST) provides potentially wider exposure by investing in a varied mix of short-term fixed income classes, including investment-grade corporate bonds and the option to add government bonds, high yield bonds, and floating rate notes. With a focus on securities maturing in less than a year, ZST aims for higher yields compared to money market funds, while keeping risk low. Its portfolio is also dynamically balanced, considering risk-adjusted yield expectations.

Capitalizing On High Cash Rates

As investors adapt to this higher interest rate environment, cash and cash alternatives are increasingly finding their way into portfolios. BMO's ETFs can be especially valuable for investors looking to confidently manage through these changes, offering both liquidity and attractive low-risk returns. Given the current economic uncertainties and attractive opportunities in cash-like instruments, the case for cash investments is stronger than ever, making them a crucial part of a diversified investment portfolio.

Featured photo by Alexander Mils on Unsplash.

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