Where Investors Are Currently Putting Their Money

Many investors are scurrying into short-term bond marketplace funds and cash alternative mutual funds as a result of the erratic stock market and Federal Reserve's recent interest rate increases.

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According to Trade Algo, money-market fund inflows were a net $96.8 billion as of mid-March, which is the highest start-to-calendar-year inflow since 2008. The third-largest monthly inflows ($10 billion) ever recorded for short-term U.S. Treasury bond funds occurred in February.

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In contrast, there have been around $22 billion in outflows from stock mutual funds and marketplace funds so far this year.

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With expected net inflows of $34 billion through mid-March, the Schwab Value Advantage Money fund (ticker: SWVXX) has had the most gain among its peers so far in 2023. The fund has an expense ratio of 0.34% and a seven-day yield of 4.5 percent.

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U.S. Treasury bonds are held by the iShares Short Treasury BondSHV +0.10% ETF (SHV). The largest expected capital inflows of its peers so far in 2023 were treasuries with less than a year till maturity ($3.3 billion). It costs 0.15% annually and yields 4.5 percent.

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According to Jack Fischer, senior scientist analyst at Refinitv Lipper, investors frequently stash cash in money-market funds following year-end tax-loss harvest or portfolio rebalancing, but the recent flurry of inflows certainly confirms their concerns.

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"A recession in 2023 continues to be a worry. Investors want that readily available capital to deploy, he says, in case that were to happen.

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Investors are probably utilizing ultra - short bond funds—those that are one year or less in maturity—as cash-like substitutes for money-market funds and a method to benefit from higher rates, according to Jay McLaughlin, corporate sales executive at EPFR's iMoneyNet, which also analyzes fund flows.

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Are these funds, however, the ideal place to save cash? Investors have more choices. According to Bankrate.com, certain online banks offer high-yield savings accounts with rates between 4% and 4.5%, and some six-month certificate of deposit rates are around 4.5%. In the most current Treasury auction for 17-week T-bills, the yield has just surpassed 5%.

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According to Bankrate's top financial analyst Greg McBride, everything depends on the intended use for the money. The "perfect parking spot" for investment capital, according to him, is money-market products in brokerage accounts. "Like a savings account, a bank deposit money account is for money you could need right away for unforeseen emergencies like a car repair or medical cost," he explains.

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Additionally keep in mind that Federal Deposit Insurance Corp. protection is available for bank money-market accounts. Money-market funds are quite secure, but they lack protection in the event of a rare financial in nature. Banks choose the interest rate they want to offer on money market accounts, and a money market fund's return is determined by yield less costs.

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Fischer claims that with cash-alternative products, fees, which lower total return, are frequently neglected.

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Investors who have camped out in ultrashort corporate bonds must keep in mind that while the Fed keeps raising interest rates, the net worth of those funds may be squeezed, leading to losses.

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Financial advisor Jeff Mattonelli of Van Leeuwen & Co. is directly purchasing U.S. Treasury bills are used to meet his clients' cash needs despite the ambiguous economic and market outlook. His clients prefer to purchase bonds outright in light of last year's bond fund losses. As there are no fees or state taxes and the yields are higher than those of money-market funds, in his opinion.

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For people's short-term cash, "we're seeing that it's producing a much more predictable outcome," he says.