NEAR: Don't Let Your Portfolio Cash Sit And Do Nothing (BATS:NEAR) (2024)

One of the great challenges of today's fixed income market is figuring out where to find yield. And not just a high yield without any regard for risk. I'm talking about generating a noticeably higher yield within an asset class while minimizing any additional risk.

Today, I want to focus on the short end of the yield curve, specifically the ultra-short end. When trying to improve portfolio yield, many try to turn the 1.7% yield of the S&P 500 (SPY) into something more by overweighting in utilities or dividend growth stocks. On the fixed income side, it could mean adding riskier long-term or high yield bonds to your portfolio. Either way has the potential of increasing your dividend yield, but it can also expose you to a lot of unnecessary risk if the market turns south.

Instead, I want to look at a simple opportunity to increase the yield on the cash portion of your portfolio by 50 basis points or more with only a negligible amount of added risk.

The iShares Short Maturity Bond ETF (BATS:NEAR) is an actively-managed ultra-short term investment-grade corporate bond fund that aims to maintain an overall portfolio duration of less than one year. In its current state, the fund's duration is just 0.3 years. That means it carries relatively little interest rate risk, while its focus on higher grade bonds means it comes with little credit quality risk as well.

That sounds all well and good, but how would NEAR be an upgrade over your current cash position and how can it effectively be implemented in your portfolio?

How Would NEAR Be An Improvement?

For many investors, the money market account is the vehicle of choice for portfolio cash. Those are the products that are designed to maintain a steady $1 share price, but are generally among the lowest yielding investments due to their high degree of safety.

If you're invested in a money market, you're probably earning in the neighborhood of 1-2%. If you use the sweep account within your brokerage account as your cash holding, you may earn that rate or you may earn nothing at all depending on which product is used.

The point is that you're probably earning very little in cash. And you can do better.

To see how NEAR would act as a suitable replacement, I like to compare it to two of the more common cash alternatives - the money market and Treasury bills. Each invests in different securities and has a slightly different risk/return profile.

Let's take a quick look at the three ETFs I'll examine.

iShares Short Maturity Bond ETF

As mentioned above, this is our corporate bond option. Roughly 2/3 of the portfolio's assets are in bonds with remaining maturities of 90 days or fewer. It holds more than 400 individual bonds and is 100% investment-grade, so even if there does happen to be a default in the portfolio, it will be very short term in nature and have little impact on the overall portfolio.

In the current environment, where a flood of Fed stimulus and the possibility of rising inflation due to strong consumer spending threaten to lift the long-end of the yield curve, it's important to stay well on the short-tend. NEAR is about as far over as you can get and will help minimize the impact of any potential fluctuations in interest rates.

iShares Short Treasury Bond ETF (SHV)

This is our Treasury bill proxy. SHV looks a whole lot like NEAR in terms of strategy and portfolio composition, except it targets government bonds instead of corporates. It also aims for an overall target maturity of one year or less and has a portfolio duration of about 0.4 years.

The advantage of a fund, such as SHV, is that investors tend to flock to Treasuries, not investment-grade corporates, in case the market hiccups. That could drive Treasury prices up and corporate bond prices down, but these notes are so short term in nature that I expect any price impacts to be small (more on that in a minute).

Vanguard Prime Money Market Fund (VMMXX)

VMMXX is one of the biggest, most accessible and highest yielding money market funds in the marketplace. Its $3000 minimum keeps it within reach for many investors and has nearly a half century of history behind it.

NEAR Wins On Yield By ~50 Basis Points

Not surprisingly, NEAR comes with a bit of a yield premium given what it invests in. Its current trailing 12-month yield is ahead of both SHV and VMMXX by 45-50 basis points.

Historically, the gaps have been both larger and smaller. It was nearly a full 1% back during the ZIRP era and shrunk to just under 30 basis points about a year ago. These numbers are what the funds returned in the past, but the current 30-day yields tell a similar story.

NEAR is at 2.21%, SHV is at 1.50% and VMMXX is at 1.68%. It's still a ~50 basis point yield premium to the taxable money market fund, but has expanded to ~70 basis points against T-bills.

Share Price Volatility Is Nearly Identical

That yield premium won't mean a whole lot if NEAR is taking excessive risk in order to achieve it. It's about risk-adjusted returns. On that front, NEAR rates very well.

I've included the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) on this chart to help see how an intermediate- to long-term investment-grade corporate bond fund compares on risk. Compared to longer-term corporate notes, NEAR comes with less than 10% of the volatility. From a pure dividend income standpoint, getting about 20% less yield with NEAR but taking 90% less risk is an attractive tradeoff, but bond investing hasn't been about yields lately. It's been about falling interest rates generating significant capital gains.

Compared to SHV and VMMXX, the risk/yield tradeoff is also very attractive. Being a corporate bond fund, it does come with a bit more risk but the difference is negligible. In this situation, the yield premium of NEAR more than makes up for the slightly higher risk.

Since NEAR is just over six years old, it hasn't been through a major bear market. The best sense of downside risk we can get is from the Q4 2018 mini-bear market.

NEAR has spent most of its time hovering in the $50.00 to $50.20 per share range. During the December bottom, it dipped to as low as $49.81, representing a share price loss of 0.8% from peak to valley. That's not a huge loss, but for a quasi-cash alternative it may be enough to give investors pause.

Conclusion

Investors may not automatically be sold on the notion of using an ultra-short term corporate bond fund as a higher yielding cash alternative, but the risk of doing so is relatively low.

The primary risk comes when interest rates begin rising and/or the corporate credit market begins deteriorating. With debt loads large and the high yield market looking more iffy by the day, there's risk that a downturn could pull the corporate bond market down with it.

That's why it's so important to stay on the short-end of the yield curve right now. With NEAR sticking exclusively with investment-grade bonds and maintaining a steady duration of around 0.3 years, total risk appears to be small, although it's certainly a non-zero proposition.

Dave Dierking, CFA