By Ben Mattlin
April 7, 2025
https://www.fa-mag.com/news/solid-yields-on-cash-are-still-possible–advisors-say-82000.html
Inflation is edging up, making further interest-rate cuts less likely anytime soon, experts say. In this unsteady, unpredictable market, where should clients be putting their cash?
Advisors say there are several good options, each with its own pluses and minuses.
For instance, one solution is Treasurys. “T-bills offer 4.3% for three months [and] 4.2% for six months,” said Eric Lutton, chief investment officer at Sound Income Strategies in Fort Lauderdale, Fla.
But bonds aren’t liquid. For some clients, tying up cash in a bond—even a short-term one—isn’t desirable, especially when there are more liquid choices for generating solid yields, said Lutton. He cited “ultrashort-term exchange traded funds,” which are ETFs that invest in short-term bonds, such as AllianceBernstein’s Ultra Short Income ETF. It’s an actively managed fund that primarily holds investment-grade instruments (corporates, Treasurys and others) with a duration of one year or less, chosen to deliver high-yield and capital preservation, according to the AllianceBernstein web site.
As an actively managed fund, it has an expense ratio of 0.25%. But the current yield is 4.43%.
As with ETFs, these shares can be traded, giving greater liquidity than owning the underlying bonds directly. “There is some risk involved,” Lutton acknowledged, at least compared to a high-yield bank account or certificate of deposit (CD) that’s backed by FDIC insurance up to $250,000 per depositor, per bank.
Another good option is to move cash to a money market fund through a brokerage account, he said. Their payouts are significantly higher than money market accounts from the bank, though they’re not quite as safe. Still, advisors say they’re about as safe as a non-bank account can be.
“Money market funds hold Treasury bills, government agency securities and repurchase agreements backed by these securities,” said Brian Therien, a senior fixed income analyst at Edward Jones in St. Louis. They “typically offer stable value by targeting a net asset value of $1 [per share], but there is no guarantee.”
What’s more, it’s easy to shift funds in a brokerage account to stocks or bonds if and when those options become more desirable for any reason, advisors say.
As of early April, money markets yielding 4% or higher were not hard to find, while inflation remains under 3%, said Peter Crane, president of Crane Data in Westborough, Mass.
Nevertheless, money markets do have a few drawbacks. First, withdrawals can take a day or two or longer to be processed. You can’t just go to an ATM and take out cash. So if clients need extra cash right away, they might be out of luck. Second, money markets aren’t backed by FDIC insurance. Though experts say it’s unlikely, loss of principal value is theoretically possible.
Clients who want those federal guarantees and immediate access to the cash on demand might be better served by a high-yield savings account from a bank, advisors say. For these accounts, the top rates tend to be offered by online banks. According to Bankrate, the highest yielding accounts as of early April were offering yields of between 3.70% and 4.30%.
Many of these accounts require a high minimum investment, and advisors warn that some of them only apply the top rate to the first $10,000 or so in the account. They may have high monthly maintenance fees, too, particularly for smaller balances, and they may limit the number of withdrawals that are allowed per month.
Moreover, the high payout rates are not guaranteed to last, said Crane. The yields tend to move in lockstep with changes in the Fed’s short-term interest rates. “While high-yield savings accounts are often temporarily higher, over time money market funds almost always outperform any type of savings account,” he said.
Other clients may prefer CDs, which might guarantee a rate that’s even higher than a high-yield savings account. As of early April, a six-month CD with a minimum initial deposit of $500 could pay out as much as 4.20%, according to Bankrate. Unlike money market funds, CDs are protected by the FDIC.
The downside, however, is that your client’s money will be tied up for the length of the CD term. Early withdrawals incur fees and penalties. And, of course, they will lose out if prevailing interest rates happen to rise. “I would not lock in cash in a CD just yet,” said Alvin Carlos, founder of District Capital Management in Washington, D.C. “Given a renewed inflation threat from tariffs, the Federal Reserve will likely keep interest rates high.”
Some advisors prefer brokered CDs to the ordinary type issued by banks. Many CDs sold through brokerage firms offer higher yields that are locked in for longer periods than those available from banks.
“Brokered CDs are liquid and tradable,” added Lutton, referring to the fact that they can be sold on the secondary market before their term is up, without a penalty for early withdrawal. The downside, though, is that some brokered CDs can be “called back” before they reach maturity. CD issuers might do this if interest rates drop, leaving the account holder with less potential gain than expected.
However they are purchased, CDs, like bonds, can be laddered with staggered term limits. As each one reaches maturity, it can be cashed out if clients need the cash or interest rates have fallen; otherwise, the proceeds can be reinvested in new CDs. “A CD ladder is an effective tool to manage and mitigate timing of locking-in rates,” said Rob Williams, a managing director at Charles Schwab. “Spreading out money across CD maturities can be a good way to deploy cash that you’re not going to need for spending, but want to invest as part of your portfolio or for money you may need to withdraw periodically.”
Whichever cash or cash equivalent option a client chooses, they ought to begin by calculating how much of their savings should be in cash. Too much, and they could lose out on the potential compounded growth of having more in stocks. Too little, and they might end up selling off other assets to cover emergencies.
There is no magic number, most advisors agree. Some say that clients should keep roughly six months of living expenses in a safe and liquid cash-equivalent account. Others recommend allocating 10% of their portfolio to cash equivalents. In general, though, what’s best may depend on a mix of market conditions and the client’s individual circumstances.
“If they are retiring soon, they should consider having two years worth of expenses in cash,” said Carlos. “If they are in the wealth-building phase, it would depend on their risk tolerance.”
Given the current state of market turmoil and uncertainty, he said, most of his wealth-building clients are earmarking 10% of their savings in cash or cash equivalents.
Fortunately, however much is in cash, these allocations can still earn a solid yield. “Yields on cash-like investments have pulled back from their recent peak, but they remain well above their average over the past decade,” said Therien at Edward Jones.
