Cash Needs vs. Chasing Yield: Choosing Between Bond Ladders and Money Market Funds
Financial advisors often see clients chasing yields without considering their overall financial picture. This is especially true when comparing US Treasury bond ladders (such as Wealthfront's Automated Bond Ladder) and state-tax-exempt money market funds like SNSXX.
Let’s break down the key differences to help you decide which is right for you.
WHAT IS YOUR GOAL?
First, define your investment objective. Are you prioritizing a steady, lower rate of return with minimal risk? If so, money market funds and treasuries can be a great option, especially considering today’s yields.
SNSXX vs. BOND LADDER
Both SNSXX and bond ladders invest in treasuries and offer state tax-exempt benefits. However, there are crucial distinctions:
SNSXX: This fund offers immediate access to your money without impacting yield. It holds very short-term treasuries, so the rate fluctuates but isn’t locked in. (If you don't have Schwab, you will need to look for a money market fund that invests primarily in US treasuries to receive the tax-exempt benefit that SNSXX has).
Bond Ladder: This strategy lets you lock in rates for specific durations. Longer terms typically offer lower yields. The catch? Early withdrawal means potentially selling bonds at a discount, significantly reducing your yield compared to SNSXX.
AUTOMATED VS. MANAGED
Automated platforms like Wealthfront offer managed portfolios for a 0.25% fee (free for the first six months). In contrast, SNSXX currently yields 5.02% (as of May 12, 2024) after fees, with more flexibility for your cash needs.
TAKEAWAY
SNSXX is ideal for: Uncertain cash needs but a definite need for access to your money. Bear in mind that, unlike bond ladders, money markets have more unpredictable cash flow. It is harder to calculate the real yield from a money market since its portfolio of bonds is changing on a daily basis.
Bond Ladders are suitable for: Specific cash needs with a known timeframe. They can also benefit conservative investors seeking a steady, predictable return for a portion of their portfolio. If you expect interest rates to go down, bond ladders will be slightly better and can lend themselves to a "dollar-cost average" investment strategy: As the bonds mature, you can invest the proceeds into the market.
Deciding Between Bond Ladders and Money Markets?
We can help! Consider booking an appointment with our financial advisors.
We specialize in helping you understand your full financial picture, strategize effectively, and make the best possible choices when considering both your risk tolerance and cash flow needs.
NOT FOR EVERYONE
Bond ladders aren’t ideal for long-term investors seeking market-like returns without a near-term cash need. The biggest challenge comes at the ladder’s maturity. If rates are lower and the market is higher, reinvesting becomes a difficult decision, especially considering the market timing challenges we saw in 2023.
THE 2023 EXAMPLE
While SNSXX offered a respectable 5.19% after-tax benefits in 2023, the DFi capital appreciation portfolio yielded a much higher 21.32%. This doesn’t downplay the importance of SNSXX; it simply highlights that risk tolerance and cash needs should always be prioritized before choosing an investment strategy.
FINAL THOUGHTS
Remember: Don’t chase yield blindly. Consider your risk tolerance and cash flow needs first. This will guide you toward the most suitable strategy, whether it’s SNSXX, a bond ladder, or something else entirely.
DiversiFi Capital LLC is a registered investment adviser located in CA and may only transact business or render personalized investment advice in those states and international jurisdictions where we are registered, notice filed, or where we qualify for an exemption or exclusion from registration requirements. Any communications with prospective clients residing in jurisdictions where DiversiFi Capital LLC is not registered or licensed shall be limited so as not to trigger registration or licensing requirements.
Past performance is not indicative of future returns, and investing always carries inherent risks, including the potential loss of principal capital. Any investment strategies are specific to individual clients and may not be representative of the experiences of all clients.
Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed.