Innovation in Cash Management

Cash management in a high-rate environment has become a performance battleground, and recently, new products have been created to help investors maximize their returns on cash reserves. Vanguard’s recent introduction of two new short-term Treasury ETFs, VBIL and VGUS, exemplifies this innovation, offering alternatives to money market funds that may provide more optimal liquidity solutions for certain investors. These ETFs provide Treasury exposure and are designed to fill a gap in portfolios where investors seek yield, stability, and liquidity for their cash reserves, without the drawbacks of money market funds or manually managed Treasury ladders.

Traditional money market funds have long been a favorite for cash management, offering price stability pegged to $1 per share. However, their stable price masks performance drag from underlying bid-ask spreads and suppressed yields during periods of volatility when funds realize losses. Compared to money market funds, Treasury ETFs lack a fixed $1 price, but their market pricing reflects true value, removing the less transparent performance drag associated with money market funds. Additionally, money market funds tend to have higher expense ratios and lack the state & local tax exemptions that Treasurys enjoy. This contrasts with low cost Treasury ETFs like VBIL (0.07% expense ratio), which are 100% invested in Treasurys.

As a hypothetical example, for investors in the upper tax brackets, if a representative money market fund generated an SEC yield of 4.16% in June, in a high-tax city/state like New York, NY the yield after paying state and local tax drops to ~3.54%, while Atlanta, GA investors would see ~3.94%. By comparison, a short-term Treasury ETF posting a 4.21% 30-day SEC yield in June, with an estimated 1–2 basis points in bid-ask costs, would net ~4.19%, exempt from state and local taxes.

Direct Treasury ladders offer similar benefits but prove cumbersome for relatively small cash positions, where the operational costs often drag returns more than the costs of an ETF. Due to the $1,000 incremental cost of each Treasury, there is typically some residual cash which cannot be invested in a laddering program, and by selecting only a handful of individual Treasury Bills, there is greater potential for performance to deviate from the indexed approach of an ETF like VBIL, which tracks all maturities between 0-3 months. ETFs offer flexible sizing and eliminate the need to manage rolling maturities.

While trading history remains limited for these new products, low-cost Treasury ETFs may present highly competitive net yields with flexible execution, within a tax-efficient structure. With the market and product offerings constantly evolving, we continually evaluate available options in search of the optimal solution to meet client-specific goals. And, as trading history builds, perhaps there could be a role for new products like short-term treasury ETFs.

Corey Erdoes, CAIA