Make Money on Idle Cash While Keeping It Safe and Accessible

Photo by Masaaki Komori on Unsplash

Instead of letting cash sit around in checking or savings accounts for Zilch, it can be parked in money market ETFs to earn a good market interest rate while remaining available upon call with little or no risk.

Let’s clarify lingo first: What does “money market” mean? And what is an ETF? After that, we’ll compare three popular issues of money market ETFs so you can pick the one that’s right for you.

The money market is a segment of the financial markets where interest-paying investments are traded which are due between a day and a year. Because of the short term until their maturity, they are “cash-like” in nature. Examples of money market securities are Certificates of Deposit (CDs) and T-Bills (short-term Treasury debt obligations).

ETF stands for exchange-traded funds. They are pools of money in which many investors can put their money and a small management team invests said money according to the ETF’s investment policy. The fund itself can be bought and sold like a stock at a stock exchange, hence the prefix exchange-traded. See my article What Is an ETF? for more details.

A money market ETF is an ETF that invests the investors’ money in money market securities, i.e. short-term interest-bearing investment vehicles such as CDs and T-Bills. The investor benefits from the following:

Receiving the interest earnings of the fund’s investments (minus a management fee known as the exchange ratio) — often a higher interest than what’s paid in a checking or even a high-yield savings account
Being able to cash in the ETF virtually daily (with only a day or two lag time called settlement period) — meaning they’re almost as liquid as money parked in a high-yield savings or checking account
Incurring virtually no price risk as money market ETFs invest in short-term securities that, by nature, fluctuate in price very little because they are short-term in duration and issued by highly solvent debtors such as the government, big banks, or reputable corporations

All you need is a regular brokerage account. Then you can invest idle cash in money market ETFs for yourself or your company or organization.

Since there are many different money market ETFs available, let’s look into three popular ones and compare them.

By the end of this article, you should be able to pick the appropriate one for your situation.

What’s going on here?

We’re comparing SGOV, TFLO, and USFR. All of them are money market ETFs designed to hold cash to earn interest at virtually no risk.

SGOV — iShares 0–3 Month Treasury Bond ETF

Is issued by the asset management behemoth Blackrock which owns the ETF brand iShares
Invests solely in interest-bearing securities issued by the US Treasury which are due within 1 day and 3 months, most commonly T-Bills. They have a fixed interest rate for the entirety of their term, just like CDs. Such investment vehicles are generally considered risk-free.
Yields the investor 5.29% per year (after the fund’s expenses)
Charges a very competitive expense ratio of currently 0.07% per year
Manages more than $19 billion
Has an average daily trading volume of 3.50M shares
Has virtually been free of price volatility with a standard deviation of 0.67%

TFLO — iShares Treasury Floating Rate Bond ETF

Is also issued by Blackrock and also belongs to the family of iShares ETFs
Invests solely in specific interest-bearing securities issued by the US Treasury called “floating rate Treasury bonds”. These are due in 2 years when first issued, but their interest rate resets weekly to the prevailing interest rate of the 3-month T-Bill plus or minus a spread fixed at issuance. Because of the longer maturity, they have a slightly higher credit risk than 3-month T-Bills. Therefore, the investor usually receives a interest rate that’s a little higher than what T-Bills pay.
Yields the investor 5.34% per year (after the fund’s expenses)
Charges a slightly higher expense ratio of currently 0.15% per year
Manages close to $7 billion
Has an average daily trading volume of 3.34M shares
Has also been virtually free of price volatility with a standard deviation of 0.68%

USFR — WisdomTree Floating Rate Treasury Fund

Is issued by WisdomTree, an established, independent ETF-firm
Invests, like TFLO, exclusively in floating rate bonds issued by the US Treasury
Yields the investor 5.34% per year (after the fund’s expenses), identical to TFLO’s
Charges an expense ratio of currently 0.15% per year, like TFLO
Manages more than $17 billion
Has an average daily trading volume of 3.96M shares
Has also been virtually free of price volatility (but the firm doesn’t publish the fund’s standard deviation)

Research note: All information gathered on 18 April 2024 from each fund’s official website except the average daily trading volume which was taken from Interactive Broker’s Fundamentals Explorer.

What does that mean?

SGOV, TFLO, and USFR look very similar in general. But there are nuanced differences.

If you expect interest rates to rise strongly and fast, TFLO and USFR are the better options because the securities held by these funds adjust their interest rate weekly (floating rate notes) while SGOV holds fixed interest rate securities (T-Bills). So, when interest rates go up, TFLO and USFR will adjust their yield upward more quickly.

Reversely, if you expect interest rates to fall by a lot and fast, SGOV is the better option because it locks in the current interest rates for a bit longer than TFLO/USFR (i.e. for a bit over a month on average).

As for how likely it is that the money market securities within each fund’s portfolio of investments are paid back in full as promised (aka credit risk):

SGOV’s portfolio is considered completely risk-free, as the US government is its sole debtor and its securities come due in a maximum of three months.
TFLO’s and USFR’s portfolios have longer average maturities with 10 months (TFLO) and 1 year 5 months (USFR), respectively.

While all the US government’s obligations (i.e. T-Bills, US Treasury floating rate bonds, and all other US treasury notes and bonds) are considered a safe haven for investors, the longer the maturity of an investment the higher its credit risk—because of higher levels of uncertainty about the issuer’s solvency with a longer time horizon.

Why should you care?

Whether you manage your finances or those of an organization, a certain level of idle cash is necessary to be ready to pay bills, meet emergencies, and take advantage of investment opportunities coming your way.

The higher your cash holdings, the more difference it will make how you park this idle money.

Here are examples of three different levels of idle cash, each calculated for one month before taxes and possible transaction costs:

For 1 month of $1,000, you could currently expect to get approximately

$0 in a non-interest-bearing checking account
$4.41 invested at a yield of 5.29% (SGOV)
$4.45 invested at a yield of 5.34% (TFLO/USFR)

For 1 month of $10,000, you could currently expect to get approximately

$0 in a non-interest-bearing checking account
$44.08 invested at a yield of 5.29% (SGOV)
$44.50 invested at a yield of 5.34% (TFLO/USFR)

For 1 month of $100,000, you could currently expect to get approximately

$0 in a non-interest-bearing checking account
$440.83 invested at a yield of 5.29% (SGOV)
$445.00 invested at a yield of 5.34% (TFLO/USFR)

Multiply these last three dollar figures by 10 if you have a million sitting around! And so on…

The longer you hold idle cash the more relevant these figures become, of course. Bear in mind, though, that these yields fluctuate daily and are by no means guaranteed.

ETF Nerd Summary…

Money market ETFs are, in general, very liquid (you can pull your money out by selling your ETF holdings and have the funds in your checking account within 1 to 3 days) and safe (there’s hardly any price risk).

The funds compared in this article, SGOV, TFLO, and USFR, are superbly liquid and pay a fair market interest rate of currently more than 5 and a quarter percent annualized. Money market ETF’s yields have lately been quite a bit higher than even high-yield savings accounts of reputable financial institutions.

As long as interest rates are stable and the US government is expected to pay its obligations on time and in full, SGOV, TFLO, and USFR differ only minutely, with TFLO and USFR having a slight edge despite their higher expense ratio.

This edge is likely to widen if short-term interest rates increase. It is expected to melt and possibly turn negative, at least temporarily, when interest rates drop. If you have a view on the direction of short-term interest rates in the US, make your selection accordingly.

If you want to minimize the credit risk of your investment into these ETFs, which indirectly exposes you to the outside chance of the US Treasury defaulting on their bills, notes, and bonds, pick SGOV for its shortest maturities.

If you don’t have a view on either, the direction of interest rates and credit risk of the US Treasury, TFLO is likely to be your best pick. It currently pays a higher interest rate than SGOV, and it has invested in shorter maturities and has hence incurred a lower credit risk than USFR.

Thanks for reading this ETF Nerd article. You are much appreciated.

Shine so brightly they all need shades,
Cristof Ensslin

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The information in this article is not an offer or solicitation of an offer to buy or sell specific securities. Nor is it an endorsement or recommendation of the specific securities mentioned. It does not constitute personalized investment, financial, legal, or tax advice. It is for educational purposes and general information only and presents the author’s opinions which are subject to change without notice. Research for this article was done thoroughly from sources the author believes to be reliable and trustworthy, but the author cannot guarantee that the presentation is complete or correct.

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Neither PRW nor its representatives are affiliated with the fund advisors, issuing companies, or fund sponsors mentioned in this article. However, PRW and its representatives may own, plan to own, or otherwise have an interest in individual securities mentioned in this article, and may benefit from you buying these particular securities.

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