I regularly get asked by subscribers about investment ideas for cash reserves. The idea is to have a place to park cash, maintain close-to-absolute stability of principal, and earn some interest on the cash. A new ETF may give investors a place to earn a bit more yield on their cash holdings.
A money market mutual fund is the classic investment for cash. Money market funds hold a $1.00 share price, accrue interest daily and pay it out monthly. Yields for these funds will be close to Treasury bill yields at the short end of the yield curve. For example, the Schwab Prime Advantage Money Fund (SWVXX) yields 3.47%. Treasury interest is exempt from state income taxes. In a high-tax state, the Schwab Treasury Obligations Money Fund (SNOXX), with its 3.36% yield, may provide a better after-tax return.
Another alternative is the Roundhill Weekly T-Bill ETF (WEEK). This fund holds a laddered portfolio of Treasury bills out to 13 weeks. With a T-Bill maturing every week, WEEK pays dividends weekly and maintains a stable $100 share price. This ETF yields 3.46% and offers a state income tax exemption.
You can see that the traditional safe cash investments yield less than 3.5%.
But now there’s an alternative.
On May 12, Kurv Invest launched the Kurv Enhanced Short Maturity ETF (LQUID). The fund holds Treasury Bills and ultra-short bond ETFs. Here are the current holdings.
The strategy of harvesting volatility risk option premium further enhances the fund’s yield. This is how a white paper from Kurv describes the trading strategy:
Volatility risk premium is the difference between the volatility expected by the market (implied volatility) and the realized volatility. The strategy implements various option strategies to capture the volatility premia. In the current environment, we look to implement monthly short option strangles (selling both out-of-the-money call and put options) on U.S. Treasury futures and secured overnight financing rate (SOFR) rates with tail-risk hedging (buying an even further out-of-the-money put option). The options sales generate option premiums that increase the yield potential of the portfolio, while the tail-risk-hedging can limit potential downside from an extreme changing-rate environment.
I had a recent call with Kurv CEO Howard Chan, and he told me the fund’s yield target is about 2% above money market fund rates. That puts the projected yield in the 5% to 5.5% range. The first dividend was paid on June 18.
The Kurv literature discusses how money market funds are the best choice for “operational liquidity,” which is money that will be used or employed in the next three months.
LQID is appropriate for “structural liquidity,” meaning capital that may be needed in three to six months.
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