How To Improve The Yield On Your Cash 10-Fold

If the Fed funds rate is going to be 4%, don’t settle for 0.4% on your uninvested cash.

One of the worst deals in the money market: the crappy 0.4% Schwab pays on unattended cash balances.

One of the best deals: the 4%-plus you can expect to get from a short-term Treasury fund offered by that very same Charles Schwab & Co.

Do you have uninvested cash? Wake up. With the Fed jacking up the overnight interest rate this week, to a range of 3.75% to 4%, your money can earn a good yield. But only if you make an effort to get it. Banks and brokers get rich off customers who don’t make an effort.

Schwab can be condemned for its shabby treatment of clients with spare cash, but then, it has lots of company. Brokers habitually pay meager rates on idle cash. Most banks deliver a similarly dreadful yield on their savings and checking accounts.

For years, low yields to customers created no bonanza for the financiers. Interest rate suppression by the federal government meant that financial institutions couldn’t do much with the cash that customers left on deposit. The rates they could earn in the institutional market weren’t much better than the 0% they were paying the little folk.

That curious condition of the money market has come to an abrupt end this year as the Federal Reserve moves to fight inflation. Result: a Treasury yield curve lying above 4% at almost every maturity, the only exception being for T bills due between now and the end of December.

There are several ways to boost your cash yield. You can go in and out of money-market funds, for example, or you can use your brokerage account to buy bank Certificates of Deposit.

Here I’ll focus on a third method: investing in ETFs. Exchange-traded funds that have portfolios of short-term bonds are an excellent way to capture decent yields. They pay better than money-market funds and they are easy to buy and sell.

Below is a select Best Buy list of short-term bond funds. Sort the list by clicking on a column head. Focus on the expense ratio if you want the best deals, on a low duration if you want the least risk from a further rise in interest rates, on assets if you want the most liquid funds.

All of these ETFs have a duration below two years, meaning an interest-rate risk no worse than you’d have on a zero-coupon bond due in November 2024. They are all good buys: 0.15% or less shaved off annually for overhead. If minimizing credit risk is important to you, look for funds with “Treasury” in the name.

There is some inconvenience in using a bond fund for cash management, but it’s worth the effort. First, make sure your broker offers commission-free trading; plenty do. Then link the brokerage account to your bank account.

Say you have $10,000 set aside now to pay your January 15 estimated tax. Move the cash to the broker, buy $10,000 of a short-term bond fund, then sell the fund at least two days before you write the check. You’re likely to earn $60 or so in interest for the two months.

It takes two days for an ETF sale to turn into cash. Getting that cash into the checking account might be instantaneous (if the discount brokerage is operated by the bank) or might take a day or two.

The return you can expect is somewhat better than the Securities & Exchange Commission yields shown in the table; these SEC-dictated numbers haven’t fully caught up with the recent climb in rates.

Consider, for example, the iShares Short Treasury Bond ETF, ticker SHV. It holds government paper maturing in an average of three months. That point on the curve now shows a yield of 4.22%, per the Treasury’s own yield report. Subtract the 0.15% fee BlackRock charges for the fund and you get an expected return of just over 4%.

There is some interest-rate risk in a bond fund, but it’s tolerable for all of these ETFs and it’s minute for the funds with very low durations. In this year of rising rates and crashing bond prices, SHV has eked out a positive return.

You’ll find the Schwab Short-Term U.S. Treasury fund (SCHO) at the other end of our 0- to 2-year duration spectrum. Its expected return, given the 4.61% yield seen on two-year Treasuries and the bargain 0.03% fee charged by Schwab, is 4.58%.

There’s palpable risk here, since this fund will lose money in the short term if rates continue to shoot up. But this is a fair bet. It’s equally likely that rates will decline, delivering you a small windfall, a price gain atop your interest return.

To qualify for the list, a bond fund must have at least $50 million in assets and at least $1 million a day in average trading volume.

Assuming you use a no-commission broker, your round-trip trading cost equals the bid/ask spread. For the most liquid of these funds, that’s just a penny on a $100 fund share. So your $10,000 trade costs you $1. Definitely worth it to grab $60 of interest.

One more piece of advice: If you make multiple investments, put each in a different fund. That way you can be picky when cashing out. You can select a losing position for sale and claim a capital loss without running aground on the wash sale rule. Alternatively, if you don’t need all the cash back right away, you can let any appreciated positions sit around until they qualify for the long-term capital gain rates.