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The Two Best Types of Fixed-Income ETFs For Managing Cash
Both of these low-risk fixed-income ETF types could be a viable substitute for certificates of deposit, money market funds, or high-interest savings accounts.
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Cash often gets overlooked in portfolio construction, but I think maintaining a dedicated "dry powder," is one of the more underrated risk management tools available to investors. Warren Buffett has long embraced this philosophy through Berkshire Hathaway, maintaining substantial cash reserves even during strong bull markets. The benefit goes beyond simply having money available to buy the dip.
Cash is an asset class in its own right. While high-quality bonds have historically helped diversify equity portfolios, that relationship isn't guaranteed. During periods of rising inflation and higher interest rates, such as 2022, stocks and bonds can decline simultaneously, leaving investors with fewer places to hide. Cash, meanwhile, largely sidesteps both duration risk and equity market volatility while continuing to generate income when short-term interest rates are elevated.
Many investors default to certificates of deposit, money market funds, or high-interest savings accounts for this role. Each has its merits. Certificates of deposit offer principal protection and predictable returns, high-interest savings accounts typically provide FDIC insurance, and traditional money market funds generally seek to maintain a stable $1.00 net asset value. At the same time, they can come with trade-offs, including lockup periods, limited liquidity, or higher fees depending on the product.
An increasingly attractive alternative is fixed-income ETFs specifically designed for cash management. By focusing on ultra-short maturities and high-credit-quality securities, these funds aim to keep net asset value volatility to a minimum while generating income that closely tracks prevailing short-term interest rates. They aren't risk-free, but in practice they sit among the lowest-risk segments of the fixed-income market and can serve as effective cash management vehicles.
Here's a look at the two categories I think deserve the most attention: Treasury bill ETFs and money market ETFs, along with some notable examples for each.
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Treasury Bill ETFs
Treasury bills are among the simplest fixed-income investments available. You can purchase them directly through a brokerage account or via TreasuryDirect. They are sold at a discount to their face value and mature at par, with the difference representing the interest you earn over the holding period.
Treasury bills are also generally exempt from state income taxes and are backed by the full faith and credit of the U.S. government. Despite recent credit rating downgrades, U.S. Treasuries continue to serve as the benchmark for the risk-free rate in financial markets.
For investors who would rather not manage individual maturities themselves, Treasury bill ETFs offer a convenient alternative. They trade throughout the day like stocks, provide regular income distributions, and automatically reinvest proceeds as holdings mature and are replaced. The trade-off is the expense ratio, which directly reduces the yield investors receive.
One of the most popular options is the iShares 0-3 Month Treasury Bond ETF
If your goal is precise exposure, my preferred option is the F/m U.S. Treasury 3-Month Bill ETF
Money Market ETFs
Money market ETFs operate under many of the same regulations as traditional money market mutual funds, but there is one important difference. Unlike mutual funds, which generally seek to maintain a fixed $1.00 net asset value per share, ETFs trade on an exchange throughout the day.
That means their market price can fluctuate slightly around their underlying net asset value rather than remaining fixed. In practice, however, volatility remains extremely low because these funds are subject to the same rules governing portfolio quality, liquidity, and maturity as their mutual fund counterparts.
Broadly speaking, investors have two choices: prime money market funds and government money market funds. Prime funds typically offer slightly higher yields by investing in high-quality short-term corporate instruments such as commercial paper, certificates of deposit, and promissory notes. Government money market funds are more conservative, limiting themselves primarily to U.S. Treasury securities, government agency obligations, and repurchase agreements.
One option on my radar is the Texas Capital Government Money Market ETF
Like all registered government money market funds, it complies with Rule 2a-7 under the Investment Company Act of 1940, which imposes strict requirements on portfolio quality, maturity, and liquidity. One feature that distinguishes MMKT from many competitors is its weekly distribution schedule.
For investors seeking an even more conservative approach, the JPMorgan 100% U.S. Treasury Securities Money Market ETF
That also makes its income generally exempt from state and local income taxes, which is helpful for investors in states like New York and California. After deducting its 0.16% expense ratio, the fund currently offers a 30-day SEC yield of 3.53% and, like MMKT, distributes income on a weekly basis.
Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.
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