Stocks are holding firm near all-time highs. But Wall Street can’t ignore the record amounts of cash still parked on the sidelines. Right now, the Federal Reserve is in no rush to keep cutting rates. Fed Chair Jay Powell said earlier this week the neutral rate is now “meaningfully higher” than prepandemic levels.
The futures market is currently pricing in one rate cut by year-end and one more by the end of 2026. The reinvestment risk into lower rates is significantly lessened this year from 2024. So the $7 trillion money market suddenly looks more appealing. Recent developments here may offer advisors and investors fresh pathways with which to attain higher yield in 2025.
The Street is expecting a much more volatile stock market, with relatively lower returns following two straight years of blockbuster gains. Policy risk remains high, and market leadership from the so-called Magnificent Seven is slated to shrink. The risk-adjusted returns on stocks will be less attractive this year. With a relatively stable short-rate market offering attractive real yields, there may be less urgency to deploy cash into higher-duration products.
At VettaFi’s Q1 Fixed Income Symposium last week, we polled our 400+ live advisor audience members on what they planned to do with their current duration exposure over the next six months. More than half said they planned to leave their current playbook unchanged. They’re opting to take a wait-and-see approach. A quarter of respondents said they expected no rate cuts at all in 2025.
So, where should investors turn to reach for more yield?
Fresh Forays Into Money Markets
BlackRock recently expanded its cash management strategies with the launch of two new money market ETFs. They are the iShares Government Money Market ETF (GMMF) and the iShares Prime Money Market ETF (PMMF). The funds both charge a fee 0.2%. They enable investors to diversify their cash holdings beyond traditional deposit accounts. This allows them to manage their cash needs flexibly. PMMF, which may hold commercial paper as well as traditional short-term government debt, marks the industry’s first prime money market ETF. Slightly riskier holdings typically translate to higher yields.
Steve Laipply, global co-head of fixed income at iShares, said cash hasn’t looked this attractive in years.
“Cash remains a significant asset class for many investors,” he explained. “Coincidentally, ETFs have emerged as the vehicle of choice for investors. Money market fund ETFs provide a convenient and transparent solution for investors looking for smarter ways to manage their cash.”
He added that regulatory changes are reshaping the money market fund landscape. “This will provide investors with greater choice, flexibility, and ease of access to money market products, particularly those who prefer the ETF structure for its convenience," he said.
The new products add to a small but growing lineup of money market ETFs. Last year, Texas Capital was the first to launch an ETF with the money market moniker — the Texas Capital Money Market ETF (MMKT). Like GMMF, the fund acts as a government money market ETF that invests nearly all its assets in cash and U.S. government securities.
Floating-Rate Products on Fire
A cloudier rate forecast has led many investors to flock to the safety of floating-rate products. CLOs have gained huge traction, with the largest CLO ETF recently hitting $20 billion in total assets. Such products meet investors’ insatiable appetite for additional yield while allowing them to manage down volatility. Beyond structured debt products, bank loans, private credit, and floating-rate Treasury funds have also seen a surge in interest. The $18 billion WisdomTree Floating Rate Treasury Fund (USFR ) has already seen north of $1 billion in net inflows for the year.
Money Market Lookalikes Getting More Active
Short-term rate demand has driven monster flows into money market funds. Staying within a range of two to three years allows investors to pick up a little extra risk cushioned by a flight-to-safety trade that offers stability with minimal rate risk.
Two actively managed ETFs drew in the bulk of last year’s inflows. The Dimensional Short-Duration Fixed Income ETF (DFSD ) boasts a low expense ratio of 0.16% and largely offers exposure to high-quality investment-grade bonds. The $12 billion PIMCO Enhanced Short Maturity Active ETF (MINT ) is designed to provide a higher yield than traditional money market funds while maintaining minimal risk. Both funds drew in nearly $2 billion in net inflows last year.
Era of Enhanced Income
FolioBeyond recently rolled out a new options overlay ETF — the FolioBeyond Enhanced Fixed Income Premium ETF (FIXP). The fund charges 1.07% and targets an average duration of zero to two years. George Lucaci, global head of distributions at FolioBeyond, told me he’s seen a growing appetite for more sophisticated fixed income products following success with their Alternative Income and Interest Rate Hedge ETF (RISR ), which earned a 5-star rating by Morningstar.
The new fund is based on the firm’s established multisector factor-based Fixed Income Model. “[We] further enhanced it with call/put options overlay strategies using bond sector ETFs,” he said. “Using a combination of our fixed income optimization model and options overlay, we are generating [income] alpha without adding volatility.”
The NEOS Enhanced Income 1-3 Month T-Bill ETF (CSHI ) is another fund that uses options overlay strategies, which has outperformed some of its largest ultra-short duration peers over the past three years. The fund is long three-month Treasuries and sells out-of-the-money SPX Index put spreads.
Recent ETF innovations have supplied advisors with an endless buffet of bond ETFs with which to help their clients reach for higher yields with minimal risk and help them more effectively pinpoint their fixed income exposure.
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