Negative real rates and high cash levels bring short-maturity ETFs into focus

Aug 2nd, 2012 | By | Category: Fixed Income

With interest rates and investment yields at historic lows and ongoing credit concerns and market volatility driving ever increasing cash levels, investors would be wise to rethink their cash allocations.

Negative real rates and high cash levels bring short-maturity ETFs into focus

The Pimco short-maturity ETFs invest in short-term investment-grade debt with the aim of generating the maximum income consistent with capital preservation and daily liquidity.

In this ‘new normal’, investors should take a more sophisticated approach to the management of their cash portfolios and consider, among other measures, the creation of ‘liquidity tiers’ to better match asset duration to cash liabilities, to avoid overpaying for liquidity in the current environment.

By identifying longer-term cash holdings and creating liquidity tiers within cash portfolios, investors can allocate a proportion of cash to higher-yielding short-term investment products that exist beyond traditional homes for cash allocation.

Many of these products, such as Pimco’s short-maturity strategy ETFs (see below), benefit from active management of credit, duration and sector positions, and thereby potentially take advantage of structural opportunities that currently prevail in debt markets, such as, for example, in so-called ‘safe spread’ sectors.

Emphasising these structural opportunities, Andy Bosomworth of investment giant Pimco says: “Short-term investors have never seen greater differentiation between risk-free and credit assets, when yields dropped to 0%, the percentage pick-up can’t be ignored.”

Recent ETF flows suggest investors are recognising this and are beginning to seek out cash alternatives. Indeed, Source, a leading European exchange-traded product (ETP) provider, has seen greater interest in its suite of EUR, GBP and USD denominated short-maturity strategy ETFs, which it offers in partnership with Pimco. These ETFs seek to benefit from the active management of duration, sector rotation and security selection with the aim of delivering higher yields for longer-term cash holdings.

James Finch of Source says: “If investors carefully analyse their liquidity requirements and are able to implement cash tiering plans, money can be allocated to longer-term solutions such as Pimco’s short-maturity ETFs with potentially favourable risk/return characteristics.”

The Pimco Source suite of short-maturity ETFs includes the London-listed Pimco Sterling Short Maturity Source ETF (QUID) and  Pimco US Dollar Short Maturity Source ETF (MINT), and the Xetra-listed Pimco Euro Short Maturity Source ETF (PJSI). Essentially, these funds invest in short-term investment-grade debt with the aim of generating the maximum income consistent with capital preservation and daily liquidity. Each ETF comes with a TER of 0.35%.

For US-based investors, the NYSE-listed Pimco Enhanced Short Maturity Strategy ETF (MINT) and Guggenheim Enhanced Short Duration Bond ETF (GSY) offer similar propositions.

A quick word of caution: though these ETFs invest in high-quality short-maturity securities and benefit from full portfolio transparency on a daily basis and the availability of both primary and secondary market liquidity, investors should understand the higher credit, interest rate, and liquidity risks involved. While they can play a highly beneficial role within a tiered cash portfolio, they should not be viewed simply as straight cash equivalents [Fitch: Popular short-term fixed income ETFs offer higher yield, but add risk].

Tags: , , , , , , , ,

Leave a Comment



More in Fixed Income
S&P reaffirms the UK's AAA rating; positive news for gilt-based ETFs
S&P reaffirms UK’s AAA rating; positive news for gilt-based ETFs

Standard & Poor's has reaffirmed the UK's 'AAA' credit rating. The stable outlook reflects the expectation that the UK government will continue to...

Fixed income ETF assets to surge, as iShares, Vanguard, Pimco and SSgA battle it out
Fixed income ETF assets to surge, as iShares, Vanguard, Pimco and SSgA battle it out

The global market for fixed income ETFs will likely grow to more than $2 trillion in assets over the next decade, compared with...

Close