On March 24, the Federal Open Market Committee, or FOMC, again decided to maintain the federal funds rate at 5.25% to 5.5%, reflecting its acknowledgment of solid economic growth and strong employment, but with the specter of persistent inflation still looming.
“While the U.S. Federal Reserve continues to assess the path of inflation, labor market health and economic growth, they have been persistent in keeping front-end interest rates elevated until they are confident that inflation has returned to their 2% target,” says Brian McMullen, senior fixed-income ETF strategist at Invesco.
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The most immediate impact for investors following the FOMC’s decision is the ongoing opportunity to secure competitive yields from short-term investments that often move closely in tune with the prevailing federal funds rate.
“Sticky core inflation, steady economic growth and a resilient labor market have pushed out the market’s expectation of Fed rate cuts so far in 2024,” McMullen says. “This could be a positive tailwind for high-quality, short-duration fixed-income funds as investors continue to be compensated with yields above 5% in short-term liquidity vehicles.”
These options are appealing because they combine safety — via high credit ratings — with minimal sensitivity to fluctuating interest rates, setting them apart from stocks and longer-term bonds.
“These products are best suited for investors who are saving for a large expenditure (e.g., a down payment, college tuition or a major purchase) with a time horizon of roughly one to three years,” says John Croke, head of active fixed-income product management at Vanguard.
Here are five of the best types of short-term investments for generating income, according to experts:
— Treasury bills.
— Certificates of deposit.
— High-yield savings accounts.
— Money market funds.
— Ultra-short-term bond ETFs.
Treasury Bills
Treasury bills, or T-bills, are short-term Federal government securities issued with maturities ranging from a few days to 52 weeks. These securities comprise the short end of the Treasury yield curve.
T-bills are sold at a discount to their face value, and when they mature, the government pays the holder the full face value. Essentially, the income investors earn on T-bills comes from the difference between the purchase price and what the government pays back at maturity.
T-bills are considered one of the safest investments, virtually free of credit risk, because they’re backed by the full faith and credit of the U.S. government. This makes them as safe as investments get, appealing to those looking for a nearly risk-free way to earn a return on their cash.
Investors can buy T-bills directly from the government through TreasuryDirect.gov or opt for more convenience by investing in them through an exchange-traded fund, or ETF, within a brokerage account.
In particular, T-bill ETFs offer the added benefits of liquidity, as they can be bought and sold like stocks, and the potential for monthly income distributions.
“For example, the Invesco Short Term Treasury ETF (ticker: TBLL) holds a portfolio of U.S. Treasury securities with less than 12 months to maturity and can provide investors access to T-bills in a single ticker, without having to continually roll positions across multiple accounts as proceeds come due,” McMullen says.
Certificates of Deposit
Certificates of deposit, or CDs, offer a way to earn a stable rate of return if you’re able to commit your principal investment for a predetermined period.
“CDs are time deposits offered by banks with a fixed term, typically ranging from a few months to several years,” says Taylor Kovar, CEO and founder at Kovar Wealth Management. “They provide a guaranteed interest rate, making them a safe and predictable investment.”
One of the key benefits of CDs is the ability to lock in a fixed interest rate for the duration of the term. This means that even if interest rates drop, the rate on your CD remains unchanged, allowing you to continue earning a competitive yield.
The lock-up period can be a disadvantage for some investors, however. “The trade-off with CDs is that your money is locked in for the term of the CD,” Kovar says. “They’re ideal for investors looking for a low-risk option and have a specific time horizon in mind.”
Finally, it’s crucial to shop around for the best CD rates since these can vary significantly depending on the term length and the financial institution, with some offering promotional rates that can significantly enhance your earnings.
[READ: 7 Best Thematic ETFs to Buy in 2024]
High-Yield Savings Accounts
For investors looking for a straightforward and secure option for short-term income, high-yield savings accounts, or HYSAs present a viable solution. These accounts typically offer annual percentage yields, or APYs, that exceed those of traditional checking accounts, alongside the advantage of daily liquidity.
What makes HYSAs particularly appealing is the coverage they come with — either by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), depending on whether the account is with a bank or a credit union. This insurance means that even in the event of the financial institution failing, your funds are protected up to $250,000 per depositor.
Just like with CDs, it pays to shop around when choosing a HYSA. Different providers offer varying APYs, and the terms can vary significantly. Some accounts might have minimum balance requirements or offer promotional rates for new customers. Taking the time to compare options can ensure you find an account that offers the best return on your savings while keeping your investment safe.
Money Market Funds
Another avenue for investors seeking safe, short-term income within a brokerage account is through money market funds such as the North Capital Treasury Money Market Fund (NCGXX).
These unique mutual funds primarily invest in high-quality, short-term debt instruments. These can include commercial paper, T-bills and repurchase agreements, among others. The main objective of money market funds is to offer investors a mix of income, liquidity and capital preservation.
Prospective investors need to understand that the net asset value, or NAV, per share of a money market fund is designed to be fixed at $1. This means under normal market conditions, the share price doesn’t fluctuate, which is not the case with other types of mutual funds.
This stability aims to provide a secure environment for investors’ capital, although it’s worth noting that in extreme market events, such as during the 2008 financial crisis, there have been rare instances where money market funds “broke the buck,” meaning the NAV fell below $1.
“We believe money market funds are currently the best short-term investment to generate income, as these kinds of funds generally invest in very short-term debt that is highly liquid, of higher quality and with less associated risk,” says Emily Cozad, portfolio manager and research analyst, and investment funds specialist at Buckingham Advisors. “Additionally, money market funds aren’t overly complicated for the average investor — making it easier to choose, invest and maintain exposure in the best option.”
For example, the aforementioned NCGXX is currently paying investors a seven-day SEC yield of 5.3% and has waived expense ratios to 0%. Despite being an institutional class fund, NCGXX is open to retail investors and does not have a minimum initial investment requirement.
Ultra-Short-Term Bond ETFs
Ultra-short-term bond ETFs leverage the flexibility of the ETF structure to offer investors a blend of yield and liquidity, similar to what money market funds provide, but with a few key differences.
These ETFs, such as the Vanguard Ultra Short Bond ETF (VUSB), primarily invest in a diverse range of short-term, high-quality bonds to target capital preservation and high present income.
For VUSB, this includes asset-backed securities, government obligations and investment-grade corporate bonds, targeting a dollar-weighted average maturity of zero to two years. It also offers the advantage of monthly income, with a current 5.1%, 30-day SEC yield.
“Short-term bond funds can also be a logical ‘first step’ back into bonds for investors who may have abandoned a traditional fixed-income strategy amidst the losses of 2022,” Croke says.
Another popular example is the Invesco Ultra Short Duration ETF (GSY). “GSY can invest in traditional money market securities like T-bills, commercial paper and repurchase agreements, but can also diversify in other segments of the fixed-income market such as investment-grade corporate bonds, agency mortgage-backed securities and AAA-rated, collateralized loan obligations,” McMullen says.
However, while ultra-short-term bond funds are relatively low risk, it’s crucial to understand that their share price can fluctuate, unlike the fixed NAV per share of money market funds. The securities in ultra-short-term bond ETFs also carry more credit risk compared to those in a T-bill ETF.
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5 Best Short-Term Investments for Generating Income originally appeared on usnews.com
Update 03/26/24: This story was previously published at an earlier date and has been updated with new information.
