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BIL ETF – A cash-like vehicle (NYSEARCA:BIL)

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Thesis

We believe that we have yet to see a sellout in the current equity bear cycle. To that end, despite the recent rally, we believe a retail investor should be cautious allocate a substantial portion of their portfolios to cash, other instruments being an extremely poor hedge against stock market volatility and losses, as we have pointed out here and here. We are always looking for good vehicles that can provide market coverage for the composition of a retail investor’s portfolio, but nothing has worked this year except cash. The larger the cash allocation, the better the performance in 2022.

The SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (NYSEARCA:BIL) aims to provide investment results that generally correspond to the price and yield performance of the Bloomberg 1-3 Month US Treasury Bill Index. The ETF is finally a vehicle which invests on the very short part of the Treasury bill curve and thus benefits from a very shortened duration profile and a yield equivalent to the front part of the Treasury bill curve.

The fund has only 14 holdings and an ignorable duration profile:

website

Assets (Funds)

An investor should think of this ETF in the context of simply rolling treasuries themselves. Due to the small amount of holdings and the short duration, the BIL portfolio represents an approximation for this. The fund only charges 0.1363% in fees and the 30-day SEC yield will increase as yields rise. Either way, a retail investor shouldn’t buy BIL for the yield, but to store money and get something in return. BIL will not make you rich or pay your monthly charges. All of the underlying securities are government-backed AAA holdings, so the fund does not expose the investor to credit risk. Correlated to the very low duration, the fund also virtually eliminates market risk.

BIL should be used for allocating liquidity to an investor’s portfolio. In the current market, we believe the cash pocket should be extremely high, as other traditional instruments have failed to provide cover in 2022 against the equity market decline. We believe the summer rally is just a classic bear market rally followed by more pain, and a savvy retail investor should increase their cash allocation. BIL is a wonderful, risk-free tool for storing your cash in volatile times and keeping your portfolio performing positively in 2022.

Performance

The fund is up nearly 0.3% since the start of the year:

alpha

Cumulative TR over the current year (Looking for Alpha)

Rather than net performance, which is ignorable, an investor should focus on the total return curve. It has a gently sloping upward curve. Exactly what a vehicle like the silver should show. In comparison, its Goldman cousin, namely GBIL, has been fairly stable since the beginning of the year.

On a 3-year basis, we obtain a similar performance graph:

tr

3-YTR (Looking for Alpha)

Please note that an investor should not expect an outsized gain when purchasing BIL. You get a cash-like vehicle, not a high-yield investment. The concern should be capital preservation with the transfer of a risk-free rate of return. BIL responds to both of these aspects.

Assets

Here are the fund’s top holdings as of August 2022:

funds

Assets (fund website)

Essentially, they are short-term Treasuries whose yields reflect the short end of the curve. From a credit risk perspective, they are all AAA and are backed by the full faith and credit of the US Treasury, so they represent risk-free assets. The fund will be rebalanced at the end of each month into an equivalent portfolio weighted by maturity.

Conclusion

The basic construction of the wallet provides for a cash-like bucket. During equity rises, the respective allocation should never exceed 5% of the portfolio and should generally be around 3%. In today’s bear market, we believe investors, based on their risk appetite, should hold a much, much larger portion of their portfolios in cash. BIL is a US T-Bills ETF that has a very short duration and no credit risk. The instrument has a stable net asset value and captures the front end of the US yield curve. We think the summer rally in equities is almost over, and a savvy investor should think proactively about allocating more to funds like BIL in their portfolios.