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Last week was a good reminder that the inflation fight is not over. Higher than expected inflation readings and a surge in retail sales means the Fed now has more ammunition to keep raising interest rates, perhaps even into the 2nd half of this year. Two more quarter-point hikes in Q1 are already priced in and there’s now a better than 50% chance we’ll see a third one in June, according to the Fed Funds futures market.

That creates some opportunity for investors. We learned repeatedly last year that the expectation of higher interest rates from the Fed consistently sent stock and bond prices lower. The opportunity may not exist there, but in the cash market it does.

Thanks to an aggressive rate hiking cycle from the Fed, yields on 3-month Treasuries are approaching 5%, the highest they’ve been since 2007.

As recently as the end of 2021, this number was 0.05%. Fixed income investors were starved for yield and had to venture out into intermediate-term junk bonds just to find anything in the 3-4% range. Today, income investors can capture a 4-5% yield with virtually no risk at all.

That makes cash an asset class that should be considered on the same footing with equities and fixed income. Granted, these rates are flexible and can change at any time, but given that the Fed has 2-3 more hikes in it and it’s repeatedly said that rates will need to remain “higher for longer”, I think we can reasonably expect 5% yields on 3-month T-bills for at least the next year or so.

Those 5% yields now mean that there is a genuine alternative to stocks in a portfolio. Not only can T-bills be used as a temporary spot to hold cash in your portfolio waiting to be deployed and get a little yield in the meantime, they can be used as a core portfolio allocation.

Think of it this way. Most people are invested in stocks. They hope for a 10-20% return in any given year, but they could be stuck with a 10-20% loss as well. Just look at what happened last year. If you think that a recession is on the way and stocks might have another 10-20% downside, you’re probably thinking about whether or not you want to risk it and stay invested.

But what if I told you that you could move into cash, get a 5% yield and just sit the whole thing out? It’s like Let’s Make A Deal. Behind door #2 could be a new car. Or it could be a donkey. Or Monty Hall gives you a handful of cash to walk away and be done. That’s what T-bills are right now for investors.

I don’t know what’s going to happen in the market any more than anybody else. But given the Fed & interest rates, a potential recession and a lot of geopolitical uncertainty, taking the 5% return and sleeping like a baby seems like something that should at least be considered.

How To Invest In T-Bills

The most straightforward way would be to go to the Treasury Direct website and buy a T-bill directly. Of course, that requires a bit of active management. You’d need to buy the T-bill and then roll it into a new one when the original matures. Or you could buy an ETF and have the work done for you.

I’ve picked out 4 Treasury bill ETFs that fit the bill (sorry for pun). All offer exposure with very little cost, but it’s worth knowing the little differences between all of them.

iShares 0-3 Month Treasury Bond ETF (SGOV)

Current yield: 4.34%

Targets the shortest of short-term T-bills. Within this group of four, it’s the cheapest at just 5 basis points, but it’s not the cheapest overall. That distinction belongs to the Schwab Short-Term U.S. Treasury ETF (SCHO) and the BondBloxx Bloomberg Six Month Target Duration U.S. Treasury ETF (XHLF).

SPDR Bloomberg 1-3 Month T-Bill ETF (BIL)

Current yield: 4.17%

BIL is one of the biggest T-bill ETFs out there with more than $24 billion in assets. It targets nearly the same maturities as SGOV, although it’s slightly more expensive. That translates into a slightly lower yield.

U.S. Treasury 3 Month Bill ETF (TBIL)

Current yield: 3.92% (as of 12/31/22)

This ETF is unique in that it will hold only the most recently issued 3-month Treasury bill. Since these auctions are held every week, TBIL will liquidate its original T-bill holding and buy the new one. It’s probably the best way to hold a pure 3-month T-bill without buying it from the Treasury yourself.

iShares Short Treasury Bond ETF (SHV)

Current yield: 4.44%

If you want to extend your duration risk just a little bit, you can go with SHV instead of SGOV. SHV holds T-bills with maturities up to one full year. It gives you slightly more yield, but also increases the potential for share price fluctuation a bit as well.

Others:

Vanguard Short-Term Treasury ETF (VGSH), Schwab Short-Term U.S. Treasury ETF (SCHO), Goldman Sachs Access Treasury 0-1 Year ETF (GBIL)

ETFs in Focus

Here’s a look at the weekly net flows/RSI matrix, where I try to get a sense of what the markets are doing relative to what investors are doing to see if there are disconnects.

Note: Most ETFs will fall above the 0% flows/AUM line because, well, ETFs take in hundreds of billions of dollar annually. So I’m looking at 1-month flows to focus on the short-term (1-week flows are too choppy to have high confidence in the results). Upper-left quadrant would identify ETFs that are performing poorly but are seeing investor money moving in. The lower-right quadrant would be ETFs that are performing well, but seeing money leaving. Both could provide contrarian opportunities. I wouldn’t call them buys or sells. Just more of a way of potentially identifying trends.

SPHB is the clear outlier here. I’d put some, but not a lot of weight into this one. SPHB has a smaller asset base than the other ETFs and is prone to bigger net flow swings on a percentage basis than the others. It’s true that money has been flowing into riskier equity products, in general, but not necessarily to the degree indicated by SPHB.

XLB and IEMG are the other two that stand out. Even though both ETFs have underperformed the S&P 500 badly in the past few weeks, they took in a combined $230 million in new money in just the past week. ETF money is still flowing in, which means there could be an underlying level of support despite recent declines.

Instagram Post of the Week

Last week, I put up a post that looked at some of the biggest “dividend contenders”. These are stocks that have raised their dividend every year for between 10-24 years. They don’t yet meet the definition of “dividend aristocrat”, which requires a 25+ year consecutive dividend growth streak, but these are companies that are well on their way. They can make great dividend growth investments and might be able to offer some more capital growth potential as well. The Vanguard Dividend Appreciation ETF (VIG) requires a 10-year dividend growth history and contains many of these names.

Overbought & Oversold

Overbought: FLOT, BITO, HEDJ, DXJ, GREK

Near Overbought: DBA, EWQ

Near Oversold: GLD, SLV, PALL, UNG, GDX, VDE, BND, GOVT, LQD, FM, EWH

Oversold: MUB, GXG, PPLT

Note: Oversold/Overbought developed using a combination of RSI and Longbow dashboard.