Cash ETFs draw a billion record as risky assets convulse

Industry icon Dalio no longer believes that 'cash is trash'; short-term interest rate is 'now about right'

Cash ETFs draw a billion record as risky assets convulse

As risky assets swing wildly, cash is enjoying its time in the spotlight.

While the Federal Reserve tightens the brakes on rising inflation, exchange-traded funds holding bonds that mature in a year or sooner have seen inflows of over US$36 billion this year, according to data from Bloomberg Intelligence.

The previous record, US$34.2 billion, which was achieved during the previous tightening cycle of the central bank, has been surpassed by this haul, reported Bloomberg News.

Risky assets are trembling as the Fed raises interest rates and reduces its balance sheet, luring money managers from all over the world to even the shortest-term debt.

One-month Treasury bills currently yield 2.75%, which is so high that Ray Dalio, the founder of Bridgewater Associates, tweeted that he no longer believes that "cash is trash" and that the short-term interest rate is "now about right."

Read more: Defensive Canadian ETF investors snap-up cash-like products

A record amount of money has been invested in cash-like ETFs as a result of this mentality, and many of them are once again reliably paying out monthly dividends.

“For the first time since the global financial crisis, you can actually get paid something nominally for being in short-term bonds,” Dave Nadig, financial futurist at data provider VettaFi, stated. “So, cash seems reasonable, for the first time in a very long time.”

With an inflow of $11.2 billion so far in 2022, the $25 billion SPDR Bloomberg 1-3 Month T-Bill ETF has taken the lead and is on track to set a new year record.

The $23 billion iShares Short Treasury Bond ETF (SHV), meanwhile, has raised almost $10 billion so far this year and is getting close to breaking its previous high of $12.7 billion set in 2018.

A series of extremely aggressive Fed rate hikes, with the prospect of more to come, have completely disrupted the financial markets.

As equities and bonds shook together, that destroyed typical portfolio combinations.

Read more: 60-40 balanced portfolio in decline but shouldn't be ruled out

According to a report released by Bank of America analysts, the only "major" asset class that saw gains in the third quarter was cash, which saw returns of 0.5%. In contrast, the S&P 500 plummeted 4.9%, while returns on long-term Treasuries fell 10%.

Even still, not everybody agrees.

The Fed is expected to hit its peak interest rate level next year, setting the dollar poised for a fall and making growth equities more appealing, according to Citi Private Bank strategists led by David Bailin, who wrote that holding cash is "a costly decision over the long run."