Investors have been piling into cash, with portfolio allocations now at 15-year highs at nearly 6%, according to the Wall Street Journal. That data point could help explain why ETFs that behave like money-market proxies, offering cashlike exposure, are so hot this year.
What’s interesting is that the reason investors are running to cash—at least according to Russ Koesterich, head of asset allocation at BlackRock—has nothing to do with demand for safety. Traditionally, that’d be the driving force behind such high cash allocations. It would suggest pessimism about markets, and the economy.
Instead, Koesterich says that investors are looking for ways to diversify equity risk, and the historical diversifier of choice—bonds—is increasingly correlated to equity, and should become more so as monetary policy evolves and rate hikes take place.
‘Cash Is Once Again King’
In that environment, “cash is once again king,” as he puts it, as the “only major asset class available to hedge equity risk.”
“Many investors interpret high cash levels as a contrarian indicator, suggesting an excessive level of caution,” Koesterich said in a blog. “Today however, there is potentially a different interpretation regarding high cash levels. High cash levels are a rational response to the changing structure of cross-asset correlations.”
In the ETF space, there’s no question that demand and performance of ETFs viewed as money market proxies are strong this year. Consider these three funds (below) as a sampling of this segment, and their year-to-date performance—a clear uptrend:
- PIMCO Enhanced Short Maturity Active ETF (MINT)
- Guggenheim Enhanced Short Duration ETF (GSY)
- FlexShares Ready Access Variable Income Fund (RAVI)
Chart courtesy of StockCharts.com