SCHO: Who Says Cash Is King? SCHO Is My Replacement For Cash
Summary The Schwab Short-Term U.S. Treasury ETF offers investors liquidity, low expense ratios, and trading with no commissions in Schwab accounts. I would love to see better yields on treasury securities, but I’m looking for a place to park my cash while I look for more equity opportunities. Since I’m not big on paying high P/E ratios across the broad equity market, I’m looking at microcaps and waiting for better ratios. While yields are weak on treasury securities, SCHO looks like a nice place to park cash when an investor doesn’t know when new opportunities will be available. I’m planning to start using the Schwab Short-Term U.S. Treasury ETF in my portfolio. The Schwab Short-Term U.S. Treasury ETF (NYSEARCA: SCHO ) is exactly what it sounds like. The ETF is filled with short term treasury securities and pretty much nothing else. The weighted average maturity is under 2 years and the very low maturity combined with excellent credit quality results in a yield to maturity of only .63%. The low yield matches perfectly with a very low risk portfolio. Short term treasury yields have generally been terrible and with very weak expected yields it makes sense for fixed income investors to focus a great deal on the costs of their investments. Check Out Those Costs The expense ratio of .08% works great for me. Having SCHO as a Schwab fund with no commissions on trading also works great. Add in average volume of over 200,000 shares per day and the bid-ask spreads should remain tight so that investors are not getting screwed by moving in and out of the fund. Basically, this investment perfectly fills a specific niche in the investor’s portfolio. Over the rest of the year I plan to start pushing some of my new contributions to the portfolio into SCHO so I can hold them there while I wait for better prices on equity. Using The Schwab Short-Term U.S. Treasury ETF in a Portfolio As frequent readers may know, I’ve been looking for fixed income investments for my portfolio. I would like to find both a bond fund that offers reasonable yields with limited risk and a bond fund that makes a suitable replacement for having cash in my portfolio while offering a small yield. It would be interesting if I could find both of those things in one bond ETF, but I find that fairly unlikely. What I found today when I looked into the Schwab Short-Term U.S. Treasury ETF was a perfect option for replacing cash in the portfolio. The average yield to maturity of .63% isn’t going to make me rich, but the ETF will protect my cash while I look for suitable equity investments. Things I Like The portfolio doesn’t hold MBS securities. Most of the fixed income ETFs I’ve been looking at were using MBS as a meaningful part of the portfolio. Since I’m buying mREITs for less than NAV and cover them regularly, I don’t want or need MBS exposure in my bond ETF. That dramatically reduces the number of options but it works just fine with SCHO. Very low duration results in very little exposure to losses on increases in the yield curve. I don’t mind having some exposure to longer durations in exchange for higher yields, but that is more important for the longer term holdings. When it comes to a replacement for cash, the short duration is great for reducing volatility. I don’t want to see my cash equivalent portion of the portfolio taking a meaningful loss right when I’m looking to trade out to buy more equities. With an average maturity under 2 years, a substantial loss is very unlikely. I’m not worried about a fluctuation of 1% in the value of my cash holdings if it means they can earn some interest and are still able to be freed up for trading within a couple minutes. Credit risk is about as close to non-existent as it comes. The holdings indicate 99.8% of the portfolio is in treasury securities with the rest in cash. That works for me. I normally don’t mind some credit risk in exchange for higher yields, but I’m holding the cash position in anticipation of lower equity prices. If the market is turning south and providing me with better buying opportunities, I don’t want those opportunities to come at the same time as wider credit spreads driving down the value of my replacement for cash. Things I Don’t Like Treasury yields are weak. That is obviously not an issue with the ETF specifically, but it is the end of the list. I don’t see any other weakness and every investment in treasury securities is going to offer weak yields. That is just the macroeconomic environment. Conclusion The Schwab Short-Term U.S. Treasury ETF looks like my best option for holding cash in the portfolio while still getting some yield to offset some of the impacts of inflation. I could just hold cash, but I’m expecting to keep pouring money into my portfolios. If I was comfortable with making huge investments at very high P/E ratios, I would just keep allocating new investments to indexing the equity market. Since I’m growing less comfortable with that, I’m looking to hold more of my portfolio in cash so I can be ready to buy in to the market when there is a meaningful reduction in prices. I will also occasionally be looking for microcap investments. Since I don’t know when I’ll find ones that I feel are very compelling opportunities, being able to earn a small yield while being able to immediately withdraw my investment at a fair value is important. So far, I have not seen anything that can top SCHO in that category. Keep in mind I’m going to take advantage of trading SCHO without commissions and since I’m simply planning to allocate part of new investments to SCHO every month or two, keeping the trading costs low is very important. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SCHO over the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.