The case for keeping a significant chunk of your portfolio in cash is as weak as we’ve seen in awhile.
Uncertainty persists in the global economy as a result of the trade war instigated by the United States, but stocks are flying. Meantime, the yield produced by the popular lineup of exchange-traded funds designed to hold cash is well off the peaks of previous years.
The yield on cash ETFs may actually be worse than you think. You often see two yield numbers quoted for these funds, one of them quite a bit higher than the other. Understanding the difference is vital to making an effective decision on how much cash to hold.
The higher of the numbers is the trailing 12-month yield, which adds up monthly income payments over the past year and expresses them as a percentage of the fund’s latest net asset value. The trailing 12-month yield is useful if you already own a fund and want to know what your backward looking yield was over the past 12 months, a period where monthly payouts were trimmed as interest rates fell.
The other yield measure, current yield, is the one to pay attention to if you’re researching a cash ETF for purchase. Current yield takes the most recent monthly payout and annualizes it. Payouts today are lower than they’ve in previous months – this explains why current yield is lower than trailing 12-month yield.
Here’s an example using a popular cash fund – the iShares Premium Money Market ETF (CMR-T). The current yield was 2.45 per cent as of the end of May, which was based on the annualized April distribution of 10.2 cents expressed as a percentage of the $50.04 NAV.
The trailing 12-month yield of 3.8 per cent for CMR reflects the higher interest rates in the second half of 2024 and early 2025. For example, CMR paid 13.8 cents per share last Nov. 21.
While current yield is more useful than trailing 12-month yield for investors planning to buy a cash ETF, it’s not without problems. The trade war’s dead weight on the economy suggests some more interest rate cuts this year by the Bank of Canada. Expect returns on cash ETFs to fall in synch, which means today’s current yield oversells what you’re likely to receive from these funds over the next 12 months.