Cash-like ETFs see big outflows

Investors are abandoning cash holdings at a record clip as momentum continues to build behind 2020s risk rally.

Roughly $5.4 billion has exited from the $20 billion iShares Short Treasury Bond exchange-traded fund — the biggest ultra-short duration ETF — over 14 consecutive weeks of outflows. That was the longest streak on record for the product, whose ticker is SHV. Meanwhile, investors have pulled $2.4 billion from the $14 billion SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) over 10 weeks, according to Bloomberg Intelligence data.

Investorsaccumulatedrecord amounts of cash earlier this year amid concern over the impacts of the coronavirus pandemic on the global economy, with assets in money-market mutual funds soaring to a record $4.8 trillion in late May.

Now that cash is coming off the sidelines as stocks surge and corporate bonds look increasingly appealing. Additionally, the Federal Reserves commitment to keep interest rates atnear-zerolevels for the foreseeable future is further curbing appetite for short-duration Treasury ETFs.

Its recognition that ZIRP will be around for a long time, combined with a rising risk appetite, said Kathy Jones, Charles Schwab Corp.s chief fixed-income strategist, referring to the concept of a zero interest-rate policy. Short-term Treasury ETFs are looking less attractive than alternatives. Equities are benefiting. We also see interest in foreign equities and high-yield and emerging-market bonds.

The S&P 500 has surged more than 55% from Marchs bottom, after plummeting into the swiftest bear market on record. The Feds credit market backstop has boosted both investment-grade and junk bonds, with the largest high-yield debt ETF climbing nearly 24% since late March. The emerging-market outlook is also considerably brighter amid the dollars continued weakness and the Feds new average-inflation targeting regime.

The exodus from ultra-short duration ETFs is also likely a result of investors trying to eliminate the cash drag in their portfolios by reinvesting in higher-yielding assets, according to Dan Suzuki at Richard BernsteinAdvisors.

Because theyre not generating any yield, they are acting as huge dead weight in many peoples portfolios, said Suzuki, the firms deputy chief investment officer. Investors are probably chasing higher returns, which means moving up the risk spectrum.

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