Put cash to work with short-term bond ETFs

May 12, 2023

Video 02:54

"There is a compelling case to be made for staying tactically defensive with an allocation to cash and short duration bond ETFs for liquidity, yield and portfolio ballast." - Tamara Stats, ETF Specialist

Hi, I’m Tamara Stats from the iShares specialist team.

With the second quarter well and truly underway we take this opportunity to take stock of how the macro environment has evolved; highlight the disconnect between what equity and fixed income markets are pricing, versus what we see playing out in real life.  And finally, the flows we are seeing show investors are generally low on conviction. All of three of these points lead us to believe there is a compelling case to be made for staying tactically defensive with an allocation to cash and short duration bond ETFs for liquidity, yield and portfolio ballast.

Firstly, the events of the last two months as it relates to the banking sector have added further tightening to financial conditions on top of the tight conditions brought about by monetary policy. Globally it was inevitable in our view that the fastest interest rate hikes since the 1980s would cause economic damage and financial cracks. Based off recent loan officer survey and bank deposit data in the US it seems the acute stress is likely behind us however the longer lasting impacts of the tightening in credit conditions won’t be seen for 6-12 months.

Back to Central Banks, the persistently higher inflation had been cause for Central bankers to continue the hiking program but with the the Fed, the ECB and our own RBA hiking cash rates by 25bps in their May meetings, there is now also signs that a pause in the program may be imminent and data dependence will prevail. US earnings season is now upon us and although the results have been remarkably robust, expectations were off a low base. The near terms catalysts for macro direction include further monitoring of CPI data and the US debt ceiling resolution or impasse.

The flows we saw in April in iShares products saw Developed Market equity outflows resumed. Both Europe and U.S. equities saw outflows, with the former logging its first negative month since December despite European equity markets being the best performing asset class YTD.

Market pricing has whipsawed between further hikes being priced, to no more hikes, and also indeed cuts as the evidence of damage becomes clearer, as early as later in 2023.  The BlackRock view is that rates will need to stay elevated for longer than the market is pricing, and we should therefore expect volatility as long as the disconnect persists.

Therefore, we recommend tactically allocating to cash, and we aren’t the only ones if anyone heard Warren Buffet’s latest earnings call. 

Volatility in markets brings dispersion, more dispersion brings more relative value opportunities. When these opportunities open up, having a liquid allocation to cash is valuable in spades.  Cash, that by the way, has been hard at work earning income, demonstrative of the higher yields on offer if you choose the correct cash or short-term bond instrument, available through our ishares ETF range.

Please contact your BlackRock relationship manager for further information.


  • Investors interested in putting idle cash to work should consider cash ETFs or short-duration bond ETFs
  • After the RBA’s continued rate hikes due to the persistently above target inflation prints- unused cash that is parked on the sidelines, can now earn yields not seen in over a decade.1
  • Cash ETFs and short duration bond ETFs can potentially add more income while helping you diversify where your short-term assets are held, all while maintaining liquidity to enable you to use your money when you want to.

Looking to get more out of your cash? Consider cash ETFs or short-duration bonds ETFs , which are currently offering higher yields than any time in the past decade.2 Investors may be able to invest in these ETFs to potentially earn more income with their cash as opposed to leaving it in the bank.

Australians are sitting on over AUD$1.4trillion in bank deposits3 and the standard options are to earn very little in a transaction account or lock your money up in a term-deposit for a defined period of time. While an investment in a fixed income fund is not equivalent to and involves risks not associated with an investment in cash or cash equivalents, they may be a better longer term payoff as yields on savings accounts and term deposits may not keep up with interest rate increases, and certainly trail those currently available in various bond ETFs.

Short Term Bond ETF Yields vs Cash and Cash alternatives

Bar chart showing that yields on short-term bond ETFs are currently higher than those of conventional savings vehicles.

Source: BlackRock, ABS. May 2023.
*The savings account rate used is the average of the four major banks standard variable savings rate.
** The term deposit rate used is the Bloomberg Australia Banks Term Deposits Rate 1 Year index.

Cash yields are the amount of interest paid by a bank over a one-year period. Cash and Bond ETFs yields are the average yield to maturity. It’s important to note that there are material differences between Savings accounts and ETFs, including investment objectives, risks, fees, and expenses. ETFs are cash, cash equivalents and fixed income investments that generally pay a set rate of interest over a fixed time period until maturity, whereupon the original principal is typically returned plus any interest earned. Early withdrawal from term deposits may result in early withdrawal fees. Most savings accounts pay compound interest, meaning earnings are added to the balance to create a larger base on which future interest is paid. Most savings accounts allow you to add or withdraw money at any time without incurring a fee. Eligible savings accounts and term deposits are principal investments and may be protected by the Financial Claims Scheme (FCS) for up to A$250,000 per account holder. While ETFs can yield more than bank deposits, they are not FCS insured and may lose value. Most ETFs seek to track an index before fees and expenses. ETFs trade on exchanges intraday at market price, which may be greater or less than the net asset value. Transactions in shares of ETFs may result in brokerage commissions and may generate tax consequences. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained. Short duration bond ETFs typically carry a higher degree of risk than the other cash ETFs or cash alternatives and should not always be used as a substitute.

Performance data represents past performance and does not guarantee future results. Investment return and principal value will fluctuate with market conditions and may be lower or higher when you sell your shares. Current performance may differ from the performance shown. For standardized performance and most recent month end performance, click on the fund’s ticker symbol; BILL, ISECIYLD

Chart description: Bar chart showing that yields on short-term bond ETFs are currently higher than those of conventional savings vehicles.

Consider Putting Idle Cash in Short-Term Bond ETFs

So how much cash should you put to work in different investments? For many, it may help to think of your cash in layers, and segment it based on how soon you will need to use it. For example, for individuals who have daily cash needs to pay for living expenses such as fuel and groceries, bank accounts are the most flexible. 

For any additional cash that will go unused immediately, however, investors have options beyond bank accounts, including term deposits, cash funds, cash ETFs and short-term bond ETFs.

Given events in the banking sector in March 2023, diversifying exposure to any single financial institution can help with risk management and may provide more security for your money if your investment exceeds the government guaranteed amount of A$250,000.

Investors interested in putting idle cash to work may consider these short-term cash and bond ETFs:

  • The iShares Core Cash ETF (BILL) invests in a diversified portfolio of high quality short-term money market instruments and cash
  • The iShares Enhanced Cash ETF (ISEC) invests in a diversified portfolio of higher yielding quality short term money market instruments, including floating rate notes
  • The iShares Yield Plus ETF (IYLD) invests in a diversified portfolio of investment grade fixed and floating rate corporate bonds (excluding those issued by the big 4 banks) as it seeks a high yield with consistent income

How to Use Bonds in Your Portfolio

Historically, bonds and money markets have served as a way for individuals and institutions to invest idle cash. The other main roles of these investments are:

  • Boost income potential: rather than rely solely on capital appreciation to grow your portfolio, bonds can help provide regular income as an important source of return. Australian Commonwealth Government Bonds and U.S. Treasury bonds are now yielding 3-5%, investment grade corporates 5-6% and high yield or emerging markets bonds 7-8%4. This income can potentially be a consistent source of returns for portfolios.
  • Equity Market Diversification: During times of high inflation, the goal of Central Banks is to reduce inflation and one option they have to do so is by raising interest rates, but rate hikes may trigger a recession of a stock market downturn. Cash, cash equivalents and bonds have generally tended to outperform when stocks decline5, since they pay a contractual rate of interest and a flight-to-quality may occur -- meaning investors turn to less risky investments and cause the prices of fixed income securities to increase (a bond’s price moves in the opposite direction of its yield). 

BlackRock Bond Pyramid

Illustration of the BlackRock Bond Pyramid, which shows the three key role bonds have historically played in portfolios.

Source: BlackRock. This information should not be relied upon as research, investment advice or a recommendation regarding the funds or any security in particular. This information is strictly for illustrative and educational purposes and is subject to change.

Chart description: Illustration of the BlackRock Bond Pyramid, which shows the three key role bonds have historically played in portfolios.

Stepping out of cash and into the world of bond investing doesn’t have to be intimidating. Whether you are an experienced investor or reallocating to fixed income, the BlackRock Bond Pyramid can help you think through the role of bonds. This framework articulates the purpose of bonds and can help you align you goals with bond investments. iShares bond ETFs offer 11 fixed income funds locally and over 100 globally, to help investors pursue their fixed income goals and objectives.