Invest Cash During Inflation In Liquid Assets

Smart investors have cash on hand right now, but dollars depreciate, so what’s the best way to invest cash during inflation?

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Mattresses, sock drawers and safety deposit boxes are so granny. Short maturity ETFs are today’s cash cookie jar.

Other options — all of which have noteworthy drawbacks — include CDs, I bonds and funds that buy Treasuries. I bonds are securities issued by the U.S. Treasury that pay a fixed-rate interest, plus a variable rate based on the consumer price index (CPI, the measure of inflation), which just jumped up again.

How do you rate cash-equivalent options? Liquidity should be the first priority, says Joseph Eschleman, president of Towerpoint Wealth in Sacramento, Calif.

“Liquidity provides the opportunity to take advantage of an improvement in interest rates or the equity market as they happen,” he said.

Investing Cash During Inflation: FTSM?

One of Eschleman’s favorite places to invest cash right now is First Trust Enhanced Short Maturity ETF (FTSM), a $5.4-billion fund. “There’s a certain peace of mind and stability that comes with size,” he said. And the beauty of ETFs is “You can buy and sell shares on a daily basis.” FTSM invests in short-maturity corporate and government bonds.

ETFs are also low cost. FTSM has a net expense ratio of 0.25%. Another ETF he likes is PIMCO’s Enhanced Short Maturity Active Exchange-Traded Fund (MINT), which has a net expense ratio of 0.35%. Like FTSM, MINT invests in short-duration government and corporate bonds.

However, Eschleman reminds clients: “It’s called a cash alternative for a reason — you could see a price fluctuation in an ETF,” even a very conservative one. But that small risk comes with at least some return. FTSM reports a 30-day SEC yield of 1.91% and MINT had a 30-day yield of 2.28%, says Morningstar Direct.

CDs: Are Not Like Cash

Investors often use certificates of deposit (CDs) as a place to park cash. But advisors say CDs aren’t liquid. Thus, in these inflationary times, Eschleman calls them “certificates of depreciation.”

“The problem with a CD is it’s fixed and you’re locking your money up for whatever maturity you pick,” and the associated fixed interest rate for that maturity, he said. And even though inflation has caused CD rates to rise, they’re still minuscule.

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“CDs play a role in” where to put cash,” said Jamie Hopkins. He’s managing partner of wealth solutions at the Carson Group, headquartered in Omaha. However, “CD rates are still low compared to inflation — so they aren’t a super enticing investment option.”

For comparison, average, three-month CD rates hit 18.3% way back in May 1981, according to Bankrate.com. Just to get a 2% return today, investors must tie up their cash for a year or more.

Investors will likely hold cash or cash equivalents for a while yet. According to the IBD/TIPP Economic Optimism Index, a leading national poll on consumer confidence, 58% of Americans now believe we are in a recession. That’s up five points in the July poll from 53% in June. And 91% say they’re concerned about inflation, up from 90% in June.

They’re right to be worried. The CPI index rose sharply in June, as the inflation rate blew past May’s 40-year peak. Consumer prices rose 9.1% from a year ago and rose 1.3% from May’s 8.6% rate (which was the previous peak). The results outpaced economists’ estimates.

Even in good times, advisors say clients should keep enough cash to cover three to six months of expenses. However, many investors have more cash than that right now, having divested some equities due to the market downturn of the past six months.

“I’m opposed to long-term plans (that tell clients) to carry one to two years of cash reserves,” said Hopkins. “That drags down your portfolio.”

I bonds

Investor demand for I bonds has boomed with inflation soaring and equities deflating. Some I bonds are paying 9.62% annually through October. And I bonds are not subject to state and local taxes, though federal taxes do apply. An I bond’s rate typically resets every six months, based on the issue date.

“I bonds are the one area that has a payout right now,” said Hopkins. But an investor can only buy $10,000 worth of I bonds in a calendar year.

There are more caveats. I bonds have a 30-year maturity, and “they’re not redeemable for 12 months,” said Eschleman. That’s not exactly cash-like. And if inflation rates fall, so does your return. Plus if an investor redeems an I bond from one to five years after it was issued he “will forfeit the last three months of interest,” noted Eschleman.

Other gotchas? You can’t buy I bonds like equities or mutual funds. Investors must buy them via the TreasuryDirect website themselves (advisors can’t do it for them).

Investors may opt instead to buy mutual funds and ETFs that hold I bonds. This makes ownership a bit easier, but like any fund you’ll be paying fees for that convenience.

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