Portfolio Perspectives: More Money (Markets), More Problems

May 13, 2024

Getting Cash Off the Bench & Back in the Game

 By Lucas Felbel, CIMA®, Director, Portfolio Services

Investors in short-term instruments may have seen strong returns over the past year thanks to the Fed’s aggressive stance on interest rates to curb inflation. Since the Spring of 2023, investors seeking refuge in money market mutual funds, CDs, Treasury bills, and other short-term instruments have celebrated annual yields exceeding 4.8%, and over 5% since late July 2023, a rarity in recent decades.1 This yield advantage not only helped to protect investors from the erosive effects of inflation but has also helped facilitate wealth preservation strategies for advisors and their clients.

Compounding this situation, stubborn inflation prints and other economic data point to interest rates remaining elevated for the time being, prolonging the reduced risk that conservative investors have experienced. Trillions in money market assets are poised to extend their run in a “higher for longer” rate environment. So, what’s the catch?

In the last 12 months the S&P 500 was up over 25%, 5-times the elevated risk-free rate. While leveraging liquid money market instruments may be beneficial to clients in the right situation such as emergency funds or short-term cash needs, broader market returns have eclipsed traditionally safer investments by a factor of five.2 This stark contrast underscores a critical dilemma facing advisors and risk-averse clients: the allure of current yields must be weighed against the potential future gains of investing in equities.

As the Federal Reserve inevitably pivots towards easing monetary policy, the era of elevated money market returns should end. Historically, downward-moving Fed rates prompt a migration of assets from bonds to equities, driven by the appeal of greater appreciation potential and reduced corporate borrowing costs further stimulating market growth.

This iteration of Portfolio Perspectives will examine a few strategies advisors may use to extend the benefits conservative-minded clients are currently realizing with money market investments, and to gradually get clients back into equities in anticipation of future interest rate cuts to help maximize opportunities for potential benefits.

Keep the High Yields Rolling

Advisors should strive to improve client experiences in every interaction, taking them from good to better. Receiving 5% on a money market mutual fund is good, especially if clients are looking to maximize returns with safety of principle. However, fund yields are immediately reactive to Fed interest rate adjustments which indicate cuts later this year. Advisors have an opportunity to raise their clients’ experience from good to better by purchasing treasury securities directly and extending the duration at which clients could receive yields at 5%+.

By cutting out the intermediary money market fund and purchasing treasuries, clients may benefit from reduced costs of ownership, increased after-tax returns as T-bills are only taxed federally, and the ability to lock in favorable yields for longer periods of time. A bonus to this method is that when interest rates are reduced, the inverse relationship between interest rates and bond valuations increases the value of the individual bonds yielding the previously higher rate level. In this example, we have just transformed a good 5% yield into a better 5%+ yield, for longer, with greater tax efficiency, and appreciation in a cutting rate environment. Good to better.

Diversify With Equity

Modern Portfolio Theory underscores the importance of diversified portfolios in maximizing returns for a given level of risk. With money market yields positioned to be reactive to potential downward interest rate moves, a more diversified, balanced approach may benefit investors over the long-term. By carefully rebalancing portfolios and maintaining a well-diversified approach, advisors can help clients navigate changing market dynamics while optimizing risk-adjusted returns.

100% bond portfolios are subject to the same concentration risk as 100% stock portfolios: being exposed to only one segment of the market. Deploying a broader, more diversified portfolio can potentially enhance returns while only marginally increasing risk.

Protect Client Portfolios, Get Buff(ered)

ETFs continue to serve as an attractive investment vehicle in the industry and fund issuers are continually launching products that cause investors to reevaluate the status quo. Buffered and “defined outcome” ETF products can offer a compelling solution for clients seeking to help with downside protection without sacrificing appreciation potential. These innovative products utilize options and futures hedging strategies to provide security in turbulent markets, making them an option for risk-averse investors transitioning away from stable shorter-term investments. Buffered ETF products may also offer downside protection with a capped upside appreciation potential.

Predecessor securities offering similar functions include fixed indexed annuities and structured notes, both of which come with a measure of downside protection for investors with a form of upside participation in an underlying index. These products are usually quite expensive to buy, own, maintain, and difficult to transact in a secondary market – all concerns that buffered ETF providers have attempted to solve for without sacrificing benefits.

Buffered and defined outcome ETFs can be a great fit for clients who may be reticent to fully jump back into the equity pool after experiencing the safer products with high short-term yields. Buffered ETF products are often positioned as a transitioning tool for clients who may be feeling market FOMO and wanting to get waist-height into the pool while maintaining a measure of principle safety.

Final Thoughts

As advisors navigate the complexities of shifting market dynamics, they have the responsibility to guide clients towards sustainable solutions aligning with a process-driven approach to investing. While the allure of high money market yields may be enticing, the potential gains offered by equities cannot be ignored. Through reasonable anticipation of market shifts and embracing innovative approaches, advisors steer clients towards continued success in achieving their long-term investment goals.

In the immortal words of Wayne Gretzky, “Skate to where the puck is going to be, not where it is.” By embracing change and remaining vigilant in their pursuit of optimal investment outcomes, advisors can help clients navigate uncertain times with confidence and resilience.

Invest with Intention.


1 YCharts US Money Market Treasury Yield – https://ycharts.com/indicators/us_money_market_account_rate

2 Yahoo Finance ^GSPC (S&P 500 Index) Historical Performance 05/15/2023 – 05/15/2024 – https://finance.yahoo.com/quote/%5EGSPC

This article is not exhaustive, and specific advice should be sought from qualified tax professionals before implementation.

For more information, contact Dynamic’s Investment Management team at (877) 257-3840, ext. 4 or investmentmanagement@dynamicadvisorsolutions.com.

As Director, Portfolio Services, Lucas Felbel, CIMA®, leads the implementation, monitoring and evaluation of trading activities at Dynamic Advisor Solutions.


This commentary is provided for informational and educational purposes only. The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. This is not intended to be used as a general guide to investing, or as a source of any specific recommendation, and it makes no implied or expressed recommendations concerning the manner in which clients’ accounts should or would be handled, as appropriate strategies depend on the client’s specific objectives.

This commentary is not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. Investors should not assume that investments in any security, asset class, sector, market, or strategy discussed herein will be profitable and no representations are made that clients will be able to achieve a certain level of performance, or avoid loss.

All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Information obtained from third party resources are believed to be reliable but not guaranteed as to its accuracy or reliability. These materials do not purport to contain all the relevant information that investors may wish to consider in making investment decisions and is not intended to be a substitute for exercising independent judgment. Any statements regarding future events constitute only subjective views or beliefs, are not guarantees or projections of performance, should not be relied on, are subject to change due to a variety of factors, including fluctuating market conditions, and involve inherent risks and uncertainties, both general and specific, many of which cannot be predicted or quantified and are beyond our control. Future results could differ materially and no assurance is given that these statements or assumptions are now or will prove to be accurate or complete in any way.

Past performance is not a guarantee or a reliable indicator of future results. Investing in the markets is subject to certain risks including market, interest rate, issuer, credit and inflation risk; investments may be worth more or less than the original cost when redeemed.

Investment advisory services are offered through Dynamic Advisor Solutions, LLC, dba Dynamic Wealth Advisors, an SEC registered investment advisor.

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