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Earn a Little Extra With Your Short-term Savings

April 29, 2018

The stock market acts in unpredictable ways over the short-term, which is why it is generally advisable to invest only long-term savings in stocks. What is a person to do with short-term savings, such as an emergency fund, so as to earn a little interest while it sits there? One idea is to invest in a short-term US Treasury ETF or mutual fund.

    

Today’s interest rate environment is what the pros call a “flat yield curve,” which means you don’t get paid much extra, in terms of incrementally-higher interest rates, when you lock your money up for longer.

    

For short-term savers, the options are looking better today versus a couple of years back. Two years ago, 6-month Treasuries yielded just 0.22%. After subtracting an estimated 0.15% for fund expenses, the net yield was a mere 0.07%, or just $7 per year for a hypothetical $10,000 investment. After paying the broker commission (commissions generally apply for ETF purchases), such an investment likely resulted in nothing – zilch – left over for the investor. That was two years ago.

    

Today, a 6-month Treasury bill pays 2.02%, or 1.87% net of estimated expenses. The same $10,000 ETF investment would earn around $187 per year – enough to pay the commission and take home $180 or so. This isn’t a great deal, but it is infinitely better than zero! A lot of people have much larger amounts of liquid savings, and so the higher yields of today might make a meaningful difference.

    

Since there is still an excess of capital in the banking system, it is likely that banks will continue, for a while at least, to offer interest rates that pale in comparison to short-term treasury rates. Thus, it might be worth your time to take a look at an ETF or mutual fund holding short-term US Treasuries.

    

A few different funds are listed on our website (https://www.josephinvest.com/funds). The one I like best is the iShares Short Treasury Bond ETF (symbol SHV). Coincidentally, this fund has an expense ratio of 0.15%. More info can be found at https://www.ishares.com/us/products/239466/ishares-short-treasury-bond-etf.

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