Investors are piling back into cash alternatives as markets have whipsawed since the start of the US-Iran conflict, led by short-term Treasury and ultra short bond ETFs. In March alone, ultrashort bond ETFs raked in about $25 billion, more than double what the category attracted in February, and six times what it pulled in during January. The figure represents nearly a quarter of the $104 billion total ETF flows. 

The move highlights a shift in how investors are choosing to navigate market stress. 

“I think it’s a lot of volatility,” said Simplify’s Jason England, Portfolio Manager and Fixed Income Strategist on an episode of The ETF Show. He noted that as the US-Iran conflict began, rates spiked across the whole curve with two year yields going as high as 4%. 

“What you started to see was people trying to get as short as they could in duration,” England said, pointing to investors piling into money market and ultra-short funds. 

Uncertainty around interest rates and inflation (which remains above the Fed’s stated 2% target rate) has made policymakers at the Federal Reserve cautious—and kept investors at the front end of the curve. 

Investors have not wanted “to go too far out on the curve” to add more duration, England said. “Flows into fixed income have been stuck closer to the front end” because of rate risk, inflation and oil shock. Rates, he explained, shot up once oil prices surged.

A prioritization of yield and stability have kept bond buyers away from further duration risk. And cash alternatives, particularly in ETFs have been the way to do both.

Historically, cash has never been an ideal place to sit, but with $8 trillion sitting in money market accounts, it’s clear that has changed. 

“In the last two decades, we've only seen yields in money markets above 3% twice—and one of them is in the current period,” England explained. With rate volatility, he noted people “don’t want that interest rate risk in their portfolio, but yet will want a little more yield.” 

“Hanging out in money markets or ultra short provides some yield but less interest rate risk, so a little bit more safety and cushion in their portfolio is what they're looking for in these strategies,” he added.

That shift has turned cash from a temporary holding position to a strategic allocation in portfolios. 

“It is a strategic allocation… to cushion and buffer your portfolio,” England said. “But then it’s also that dry powder for when you see opportunities.” 

Despite the high inflows into fixed income, this isn’t a crowded trade, England said. At least, not yet. England explained that investors have moved out of fixed income into alternatives. 

“We've seen other asset classes like alternatives take up some of the allocations that we would've seen go to fixed income in the past,” he added.

Opportunity within fixed income is evolving. While credit spreads have been tight and duration risk difficult to manage, England sees value in more sophisticated strategies, particularly those that can harness volatility.

“Convexity risk is really the most compelling,” he said. “You can get that in Treasury option income strategies, where you're looking to capture rate volatility, but in range-bound markets, and enhance your yield by selling options on Treasury futures.”

These strategies offer investors a way to generate income without taking on credit risk or duration risk, while still enhancing yield.

But if markets change, the shift out of cash might not be as fast as some think.

England expects some stickiness to remain unless there are meaningful changes to the macro picture. 

“I think it's gonna be a slower move than people will think because of the attractive yield you're getting. You'll see people hang out for a while longer.

Eight trillion is a lot to move out of cash, he noted “so it’s probably not going to be fast moving out of money markets.”

Source: The ETF Show - Investors Run to Cash Alternatives as Markets Remain Volatile