ICSH: One Potential Place To Park Idle Cash – iShares Ultra Short-Term Bond ETF (NYSE:ICSH)

As we’ve previously written, we are less optimistic about the market’s potential returns from current levels for the next few years. While many valuation indicators point to a richly valued market, the economy is showing signs of weakening.

It is not that we are overly concerned about the economy, but mostly that we think current valuations are priced for robust economic performance – and once it becomes clear to investors that the best they can expect for the next couple of years is 1-2% GDP growth, multiples could come down considerably.

One telling indicator is the percentage of IPOs coming to the market with negative earnings. Prof. Jay R. Ritter from the University of Florida has published research where it is easy to see that 2018 was one of the years where investors were most welcoming the money losing IPOs. While it is reasonable for many promising companies to be posting losses early on; when the percentage gets this high, it is usually a sign that investors are being more greedy than fearful. It is also concerning that the percentage of tech stock IPOs was relatively low, meaning investors are increasingly tolerating losses even in more traditional industries.

Source: Prof. Jay R. Ritter

It is not only unprofitable IPOs that are seeing their valuations getting stretched. We wrote an article on Zoom (ZM), describing the many positive attributes we saw in the company and hoping that it would enter the market at a reasonable valuation. It had been valued in a private round in 2017 around $1B, and given the growth it had experienced since then and markets being welcoming, we expected it would IPO at a $2-3B valuation. Instead, it is now trading at around $16B and, to his credit, even CEO & Founder Eric Yuan said it looks like a “crazy valuation”.

Some additional signs of stress that are appearing include unexpected flows into safe-haven currencies like the dollar and the Japanese yen and weakening world trade volumes. Then, there is South Korea, considered by some to be a bellwether for global trade and technology and which recently reported that its economy unexpectedly contracted for the most recent quarter.

For all these reasons, we find the optionality provided by cash quite attractive, even if the yield available is still relatively low. One ETF we like for investing cash without taking much risk is the iShares Ultra Short-Term Bond ETF (ICSH). According to its prospectus, the fund “seeks to provide current income consistent with preservation of capital”.

The ICSH ETF has what we consider an attractive fee, which is important given that the yield on these investments is not that high.

Source: iShares website

Looking at its historical prices, one can see that during times of market stress, the maximum drawdowns have usually been limited to about -1%.

Data by YCharts

Interestingly, when graphing shorter time periods, it is easy to see the ex-dates in the share price.

Data by YCharts

The ICSH ETF pays a monthly dividend that is almost 3% per year. It has some interest rate risk given its 0.46 years effective duration and credit risk.

Source: iShares website

We are not overly concerned, however, with the credit risk, given that most of the exposure is high-quality investment grade. BlackRock’s iShares makes clear, however, that ICSH is not a money market fund and that it is actively managed by BlackRock’s cash management team.

Source: iShares website

One reason we are comfortable is that the ETF invests mostly in assets like commercial paper and money market instruments, which tend to be well protected and usually have very short-term maturities.

Source: iShares website

It is important to remember that given the short maturity of most of the assets in which this ETF invests, changes in Fed rates are reflected relatively quickly in the dividend yield. Investors looking to “lock” a certain level of interest rate could consider other options that invest in bonds with longer maturities, such as intermediate or long-term treasuries or municipal bonds.

Other options

There are other similar ETFs that can be considered for the same purpose. For example, the Invesco Ultra Short Duration ETF (GSY) and the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL). Below, we show the total return for the last year that each of these ETFs has delivered. ICSH has delivered the highest return of the three, while BIL has had the least volatility.

Data by YCharts

We like the extra yield that ICSH and GSY provide, even if that means taking a little bit more risk. Other investors could be better served by the increased safety that comes with investing in BIL. Below, we include a table with what we see as the most important characteristics of these ETFs, but investors considering them should read their prospectus.

Takeaway

In our opinion, the combination of relative safety with a decent yield makes ultra-short duration ETFs an attractive option as a place to invest some cash while waiting for more attractive stock market valuations.

Our preferred option ICSH has some interest risk, as well as credit risk, but according to its prospectus, it is designed with preservation of capital in mind. Looking at its historical prices, it appears to have behaved well even during times of market stress.

Disclosure: I am/we are long ICSH, GSY. 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: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling investments you should do your own research and reach your own conclusion, or consult a financial advisor. Investing includes risks, including loss of principal.