3 Money Market ETFs U.S. investors can use to risk-off

The case for money market instruments

Look, I'm all for "buying the dip" and averaging down positions throughout a bear market. However, not everyone has this luxury. Some individuals simply cannot tolerate the volatility. Others rely on a stable portfolio to sustain withdrawals for income needs. Many institutions have risk management guidelines that prevent them from taking on excessive market beta. 

We can talk all day about fancy market-neutral strategies, hedging using derivatives (which I discussed in a previous article), buying precious metals, or holding cash. Still, the simplest way to risk-off during high volatility is to reduce equity exposure by increasing allocations to money market instruments until portfolio volatility is reduced to an acceptable level. 

These are short-term, investment-grade fixed income assets with a very, very low level of risk (some would say "risk-free," although I disagree with using that term as a risk management professional). Think of instruments like certificates of deposit (CDs), short-term (less than one year) Treasury Bills (T-Bills), and high-interest savings accounts (HISAs). 

These instruments are backed by trusted entities and have virtually no default risk (full faith and credit of the U.S. government or Federal Deposit Insurance Corporation), have minimal interest rate risk (in the form of ultra-short durations), and offer a small, but tangible yield (through interest and coupon payments). What's the catch?

The downside is that many of these instruments will have poor total returns. A risk-free asset will intrinsically offer poor rewards. Think around 1-2% annually with all distributions reinvested, depending on current bond yields. This will not beat inflation, even at the 2% target levels, the Fed aims for (a great alternative here is I-Bonds, but you can only buy $10,000 worth annually). 

Still, it beats holding straight cash in a brokerage account and ensures that capital remains safe even in the worst of crashes. Many retirees opt for a CD or T-Bill ladder that holds 1-3 years' worth of living expenses for this reason. When the tide goes out, cash and money market instruments are the only assets with their clothes still on, so to speak. 

Passive ETF solutions

Yes, investors can buy individual Treasury bills on TreasuryDirect and CD's through their local bank branch. That is always an option. However, a more straightforward, more hands-off managed solution can be implemented quickly by buying a money market exchange-traded fund (ETF). 

These open-ended funds hold a basket of money market instruments (usually T-Bills). Investors can buy shares of these ETFs on exchanges through most brokerages. The ETF manages the holdings passively on the investor's behalf, charging an expense ratio for doing so. Because the yield of T-Bills is so low, keeping fees low is paramount. 

I used ETF Central’s screener to find a list of short-duration, AAA grade money market ETFs that investors can use to hold cash with, ranked in order of lowest interest rate sensitivity to highest (although all three have very low effective durations compared to other bonds).

List of AAA Grade Money Market ETFs

1. iShares 0-3 Month Treasury Bond ETF (SGOV): Tracks the performance of the ICE 0-3 Month US Treasury Securities Index. The effective duration is 0.09 years with an expense ratio of 0.03% (waived from 0.12% until at least June 20th, 2022).
2. SPDR Bloomberg 1-3 Month T-Bill ETF (BIL): Tracks the performance of the Bloomberg 1-3 Month U.S. Treasury Bill Index. The effective duration is 0.13 years with an expense ratio of 0.13%.
3. Goldman Sachs Access Treasury 0-1 Year ETF (GBIL): Tracks the performance of the FTSE US Treasury 0-1 Year Composite Select Index. The effective duration is 0.33 years with an expense ratio of 0.12%.