Cash has poured into money market funds since the Federal Reserve began its rate hike cycle. But now that central banks appear to be on the verge of cutting interest rates, financial advisers are trying to steer clients away from these funds because their yields could soon fall sharply. Short-term debt has been a popular investment over the past few years, with money market funds being a prime example. According to the Investment Company Institute, money market funds currently exceed $6 trillion, of which nearly $2.5 trillion comes from retail investors. Money market funds totaled about $4 trillion as of the fourth quarter of 2019, according to the St. Louis Federal Reserve. Money market funds hold very short-term debt, many currently yielding above 5%. But their yields are closely tied to the Fed’s benchmark interest rate, and they don’t receive price gains from falling interest rates like long-term bonds. “The money market landscape, in my opinion, is really making it difficult for investors to make good decisions right now,” said Sam Huszczo, founder of SGH Wealth Management in metro Detroit, Michigan. Huszczo said he has been using floats in recent years to Interest rate risk senior loan products to generate short-term returns. But now that a rate cut by the Fed is becoming more likely, Huszczo is turning to a target-date maturity bond fund, Invesco’s BulletShares ETF. Huszczo said with interest rate cuts looming, it’s better to act sooner rather than later. “Instead of parsing between locking in 5.4 or 5.29, both of which are perfectly fine, it just takes one economic event that you can’t predict for them to suddenly disappear,” Huszczo said. The potential benefits of target-date bond funds are, They effectively “lock in” the interest rate for the investor at the time of purchase. These funds buy and hold debt until maturity, unlike many other exchange-traded funds. This leaves the fund’s time exposure roughly unchanged. “Bond funds can get crushed, but at least over these defined periods, it’s really more like a standard fixed-income instrument where you end up getting principal and interest,” said Todd Sohn, Strategas ETF strategist. Because of the yield, The curve has started to flatten, so moving to intermediate-term bonds doesn’t mean giving up much income at the same time. For example, the Invesco BulletShares 2029 Corporate Bond ETF (BSCT) has a 30-day SEC yield of 4.94%. Closer to 5%. Active Management For investors who don’t want to manage their own bond strategies, actively managed bond funds may make sense, said Ken Brodkowitz, chief investment officer at Gries Financial Partners, which has turned to strategic income funds. Longer durations. These are actively managed multi-sector bond funds that have the flexibility to seek additional yield when interest rates fall. “When we looked at some of these products, we found those that had durations that worked for us,” Brodkowitz said. products – very short, two years or less – but not really out of the risk curve. Many companies offer strategic income mutual funds. One example is Fidelity Strategic Income Fund (FADMX), which has a four-star rating from Morningstar. Active bond ETFs have shown strong growth. BlackRock Flexible Income ETF (BINC) More than a year after listing, its assets have exceeded US$3.5 billion, focusing mainly on short-term and medium-term debt. Brodkowitz did say that Grice Financial does not expect the Federal Reserve to cut interest rates significantly, and it still uses the U.S. Treasury’s 3-month term. The fund retains short-term interest rate exposure in the form of the Bills ETF (TBIL), which has a much lower expense ratio than many actively managed products. Cash on the sidelines? Some on Wall Street describe trillion-dollar money market funds as “on the sidelines.” “Extra cash”, if launched, could fuel further gains for stocks. However, investors appear content to reap gains, even if their returns lag the stock market. Strategas’ Sohn noted that money market fund assets continued to grow in the 1990s, despite the Road-era enthusiasm is beginning to build. “Historically, you don’t see money market inflows stop or turn into outflows unless interest rates go below 3 percent. People are just happy with 4 and 5,” Sohn said. For young investors, missing out on opportunities by not getting into the stock market could be a long-term mistake, said Callie Cox of Ritholtz Wealth Management. “I think this is one of the biggest mistakes investors are making right now, and at Ritholtz we are actively educating our clients about the changing interest rate environment and the opportunities you may miss if you give up too much money and turn it into cash,” Kao said kes. Hushizo said some investors seemed to have psychological barriers. The promise of short-term gains with very low risk masks the opportunity for better long-term returns. “For most people, the opportunity cost is more painful than the actual loss,” Huzizo said.
When the Fed cuts rates, these income funds may perform better than money market funds | Real Time Headlines
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