These income plays could do better than money market funds when the Fed cuts rates
Jesse Pound | CNBC | July 31st, 2024
Money market funds have grown above $6 trillion, but they could be less attractive as interest rates fall.
Money market funds hold very short-term debt, and many currently offer a yield above 5%. But their yields are closely tied to the Fed’s benchmark rate, and they won’t get the price benefit from falling interest rates like longer-term bonds could.
“The money market landscape is really, in my opinion, something that’s making it hard for investors to make the right decision right now,” said Sam Huszczo, founder of SGH Wealth Management in the Detroit, Michigan, metro area.
Huszczo said he has been using senior loan products, which have floating rate exposure, to capture short-term yield in recent years. But now that a Federal Reserve cut is growing more likely, Huszczo is shifting toward target date maturity bond funds — namely Invesco’s BulletShares ETFs.
With interest rate cuts looming, it is better to move early than late, Huszczo said.
“Instead of parsing between locking in 5.4 or 5.29, it’s like, both of those are really good, and all it takes is one economic event that you cannot predict for those to go away abruptly,” Huszczo said.
The potential benefit of the target date bond funds is that they effectively “lock in” a rate for investors at the time they are bought. The funds buy and hold debt until it matures, which is different from many other exchange-traded funds. This keeps the funds’ time exposure roughly constant.
Huszczo said there seems to be a psychological barrier for some investors. The promise of short-term yield, with very little risk, overshadows opportunities for better long-term returns.
“Opportunity cost is way easier pain to stomach for most people than actual losses,” Huszczo said.
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