Professional traders and investors know when to deploy their money in the market when the conditions favor their particular strategy.
They know when to step aside when the conditions are not favorable.
For example, the Wheel Strategy works great in a stable sideways or an upward market.
When the market is in a correction or downtrend, they withdraw their money from the market.
Because of the leverage that options give, option traders typically do not deploy all their capital, nor even use their full buying power.
When investors and options traders need a place to park their money, fixed-income ETFs can be a viable option.
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They are exchange-traded funds that invest in bonds, loans, and other interest-paying securities.
Investors can easily get in and out of them by buying and selling shares, just like a stock in an ETF.
SHV is the ticker for the iShares Treasury bond ETF, which invests in U.S.
Treasuries with maturities of one year or less.
It is commonly used as a cash alternative.
However, unlike idle cash, it generates interest income equivalent to that generated by Treasury bonds.
BIL is the SPDR Bloomberg 1-3 Month T-Bill ETF.
It is very similar to SHV, except that it holds shorter-term T-Bills with maturities of 1 to 3 months.
In 2023, when the federal interest rate exceeded 5% per year, there was a surge in popularity for T-Bills.
However, investors found it cumbersome to purchase actual Treasury bills, so buying the BIL ETF with a few clicks was much more convenient for moving cash in and out.
SGOV is the iShares 0-3 Month Treasury Bond ETF.
Many of these short-term Treasury ETFs look like this when charted:
This is because the NAV (net asset value) of the ETF drops every time it distributes dividends to shareholders.
If you include the dividend payout in the calculation, you will find that investors in these funds make a return similar to that of the risk-free rate of return as determined by the 3-month T-bill.
This is why these short-term Treasury bond ETFs can be used as cash equivalents.
The key word here is “short-term.”
Long-term Treasury bonds, such as TLT (the iShares 20+ Year Treasury Bond ETF), cannot be used as cash equivalents because their charts exhibit significant fluctuations.
Long-term bonds lock in rates for decades, so their market value fluctuates significantly when interest rates shift.
It is a bet on the long-term interest rate.
Short-term bills mature quickly, so their prices don’t fluctuate significantly since the bonds mature and roll over frequently.
Its NAV value is less sensitive to rate changes.
We highlighted SHV, BIL, and SGOV as a few short-term Treasury bond ETFs that can serve as a cash equivalent to park your cash and earn a risk-free interest rate.
But there can be others as well.
VettaFi’s ETF list is a good place to look more.
We hope you enjoyed this article on fixed income ETFs.
If you have any questions, send an email or leave a comment below.
Trade safe!
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.
