Vanguard Survey Shines Light on Ultra-Short-Term Bond ETFs

Humility may be the most valuable virtue an advisor can possess. To be humble is to acknowledge your strengths and weaknesses without letting pride or self-importance cloud your judgment. To paraphrase the Greek sage, Socrates, wisdom is the awareness of one’s ignorance.

I lead with this philosophical perspective because a great advisor is always looking for blind spots, and one of those may be in managing clients’ short-term cash needs.

A survey published Wednesday by The Vanguard Group found that 60% of Americans admit they don't fully understand how interest rates impact their savings, which translates into most Americans putting their cash savings into vehicles that often trail inflation.  

More specifically, the Vanguard survey found that 57% of respondents report that their savings are earning less than 3% interest, including 24% earning less than 1%.

The average bank savings account pays 0.41% interest, according to the Federal Deposit Insurance Corp. (FDIC). For a good dose of humility, that’s about the same rate that cash sweep accounts pay at major brokerages.

What yield are you getting for your clients’ short-term cash needs? Better yet, how can you add value by showing your clients how to get up to 10 times what they’re currently earning?

Ultra-Short-Term Bond ETFs and Cash Management

Cash sweep accounts are best suited as a temporary holding place for a matter of days—not for months and certainly not for years. While some brokerages offer high-yielding money market accounts for short-term cash needs, ultra-short-term bond ETFs like the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL), the iShares 0-3 Month Treasury Bond ETF (SGOV) and the JPMorgan Ultra-Short Income ETF (JPST) offer attractive alternatives.

Each of these ultra-short-term bond ETFs are paying yields above 4.1%. IVV has the lowest expense ratio of the three at 0.09% while expenses for BIL and JPJST are 0.136% and 0.18%, respectively.

This makes for an outstanding opportunity to speak with clients about their idle cash in savings accounts. While brokerage accounts aren’t necessarily meant to be cash management vehicles like bank accounts, financial advisors can more than justify their fees by increasing clients’ short-term cash yields by 10 times (comparing 0.41% on a typical savings account to 4.1% on an ultra-short-term Treasury ETF).

What’s more, ultra-short-term Treasury bond ETFs pay more than the current rate of inflation, and they have very little downside risk. Thus, they can be a smart way to fill those blind spots and help your clients sleep at night while the rest of the world worries about inflation.