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Options

Option Matters - Purchasing Put Options Based on a Bearish Flag


As the following graph shows, in July 2018, Shopify Inc. cl. A (SHOP) reached a double peak at around $230. This slowed its momentum, with the stock subsequently falling to $172.90 to climb back up to its current level, $195.81, by Friday, August 10, 2018. This rally, which looks very much like a bearish flag, may be short-lived. If this is the case, the trend will turn bearish again, with the stock testing the $140 support level.

 

Daily Chart for SHOP ($195.81, Friday, August 10, 2018)

 

An investor who agrees with this scenario and wants to profit from it could buy put options expiring on October 19, 2018, selecting the strike that would yield the best return if the stock is trading at $140.00 when the options expire.

We will choose from among the following put options:

  • SHOP 181019 P 150 at $2.60
  • SHOP 181019 P 160 at $3.65
  • SHOP 181019 P 170 at $5.65
  • SHOP 181019 P 180 at $8.40

 

Position

Comparative Table of Put Options

 

As the above table shows, given these four put options, it is SHOP 181019 P 160 at $3.65 that has the optimal combination of risk and return, offering a potential return of 447.95% if SHOP reaches the target price of $140.00 on October 19, 2018. So we will execute the following transaction:

 

  • Purchase of 10 put options, SHOP 181019 P 160, at $3.65
  • Debit of $3,650

 

Profit and Loss Profile

Target price on the put options, SHOP 181019 P 160 at $3.65 = $20.00 ($160 – $140)

Potential profit = $16.35 per share ($20.00 – $3.65), for a total of $16,350 

Potential loss = $3.65 per share (the premium paid) or $3,650

 

Intervention

Even though the target price for shares of SHOP is $140.00, our potential profit is tied to the $20.00 target price on the put options. Therefore, as soon as the price of the puts reaches $20.00, we will liquidate the position, even if SHOP has not yet reached the target price of $140.00.

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This material is from Bourse de Montréal Inc. and is being posted with its permission. Opinions expressed in this document do not necessarily represent the views of Bourse de Montréal Inc.

This document is made available for general information purposes only. The information provided in this document, including financial and economic data, quotes and any analysis or interpretation thereof, is provided solely for information purposes and shall not be construed in any jurisdiction as providing any advice or recommendation with respect to the purchase or sale of any derivative instrument, underlying security or any other financial instrument or as providing legal, accounting, tax, financial or investment advice. Bourse de Montréal Inc. recommends that you consult your own advisors in accordance with your needs before making decision to take into account your particular investment objectives, financial situation and individual needs.

Although care has been taken in the preparation of this document, Bourse de Montréal Inc. and/or its affiliates do not guarantee the accuracy or completeness of the information contained in this document and reserve the right to amend or review, at any time and without prior notice, the content of this document.

Neither Bourse de Montréal Inc. nor any of its affiliates, directors, officers, employees or agents shall be liable for any damages, losses or costs incurred as a result of any errors or omissions in this document or of the use of or reliance upon any information appearing in this document.

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from The Montreal Exchange and is being posted with The Montreal Exchange's permission. The views expressed in this material are solely those of the author and/or The Montreal Exchange and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


19784




Macro

Invesco - Selecting an Alternative Strategy


How to incorporate alternatives into a portfolio

In order to determine the right plan for you, I recommend following this multi-step process:

  • Define your investment objectives. As one of my previous blogs explained, “alternative investmentsare simply tools investors use in an effort to achieve their investment goals.” As such, prior to making any decisions about alts, it is essential for investors to define their objectives. There are many alternative investment strategies designed to help build wealth, preserve wealth or enhance current income. Defining your goals will facilitate the decision-making process.
  • Identify alternatives that are consistent with your objectives. Once you have defined your goals, it is much easier to hone in on the most appropriate alt strategies. To help investors, Invesco has created an investment framework (shown below) that organizes the liquid alternatives universe around common objectives.

 

 

This framework lists common investment objectives and the corresponding alternative strategy

To shed further light, the table1 below summarizes the historical performance characteristics of the various strategies comprising the above framework.

This table summarizes the historical performance of different alternative strategies

 

  • Research specific funds. Once investors have decided which strategies to incorporate, they need to select the appropriate fund or funds to invest in. An investor should only invest in a fund after they understand its unique characteristics, such as expected return and risk, what constitutes a favorable/unfavorable environment, expected performance during different market cycles and key drivers of return. To assist in this research, investors can find a wealth of information using the fund websites and research sites such as Morningstar®. Investors may wish to consider the benefits and risks of a single-manager fund versus a multi-manager fund. With a single manager, investors can adopt a focused strategy, as single-manager funds usually have a well-defined investment approach. However, investors will be assuming manager risk (e.g., the risk of selecting an underperforming manager). Investing across multiple managers (or in a multi-manager fund) can help mitigate manager risk. But, the disadvantage of multi-manager funds is the allocation across managers and strategies typically fluctuates over time, thus limiting an investor’s ability to be targeted in their exposure to a particular strategy.
  • Decide how much to invest in alternatives. There is no one correct answer to the question of how much to invest in alternatives. In my experience, investors typically allocate between 5% and 30% of their portfolios to alternatives, and many of the investment firms I work with typically recommend a 10% to 20% allocation (depending on the goals and objectives of the individual client). This decision is typically driven by an investor’s familiarity with these assets, along with their risk tolerance. I believe that, whatever the allocation, if an investor decides to use alternatives, the amount should be sufficient to impact the portfolio. If the allocation is too small, the impact on the portfolio will be negligible, thus defeating the purpose of adding alternatives.
  • Choose how to fund the investment in alternatives. I am a big believer that asset allocation is as much an art as a science. Furthermore, every investor has unique investment objectives that will drive their asset allocation decisions. As a result, there is no one-size-fits-all answer to the question of how to fund an allocation to alternatives. That said, I suggest investor alt allocations be based on return and risk characteristics. If the alternative has predominantly equity-like return and risk characteristics, the investment should be funded as if it were an equity investment. Similarly, if the alternative has predominantly fixed income-like characteristics, it should be funded like a fixed income investment.

 

Applying what we’ve learned

We have covered the basics of alternatives, why these assets may be helpful in investor portfolios, historical performance and how to select an alt strategy. My final blog in this series will seek to apply what we’ve learned to the current market environment. In the meantime, learn more about Invesco and our alternative products.

 

1 Source: StyleADVISOR, September 2001 – March 2018. Maximum decline refers to the largest percentage drop in performance. Equities are represented by the S&P 500 Index. Fixed income is represented by the Barclays U.S. Aggregate Bond Index. Inflation hedging is represented by 75% FTSE NAREIT US Real Estate Index Series, All Equity REITs and 25% Bloomberg Commodity Index. The 75%/25% split reflects Invesco’s belief that investors tend to invest in strategies with which they are more familiar. Principal preservation is represented by the BarclayHedge Equity Market Neutral Index. Portfolio diversification is represented by 60% BarclayHedge Global Macro Index and 40% BarclayHedge Multi Strategy Index. Multi strategy is underweighted in this example due to its potential overlap with global macro. Equity diversification is represented by the BarclayHedge Long/Short Index. Fixed income diversification is represented by equal allocations to BarclayHedge Fixed Income Arbitrage Index and S&P/LSTA US Leveraged Loan Index.

Past performance is not a guarantee of future results.

Investments cannot be made directly into an index.

The S&P 500® Index is an unmanaged index considered representative of the US stock market.

The Bloomberg Barclays U.S. Aggregate Bond Index is an unmanaged index considered representative of the US investment-grade, fixed-rate bond market.

The FTSE NAREIT All Equity REIT Index is an unmanaged index considered representative of US REITs.

The Bloomberg Commodity Index is a broadly diversified commodity price index.

The BarclayHedge Equity Market Neutral Index includes funds that attempt to exploit equity market inefficiencies and usually involves being simultaneously long and short matched equity portfolios of the same size within a country.

The BarclayHedge Global Macro Index includes funds that carry long and short positions in any of the world’s major capital or derivative markets.

The BarclayHedge Multi-Strategy Index includes funds that are characterized by their ability to dynamically allocate capital among strategies falling within several traditional hedge fund disciplines.

The BarclayHedge Long/Short Index includes funds that employ a directional strategy involving equity-oriented investing on both the long and short sides of the market.

The BarclayHedge Fixed Income Arbitrage Index includes funds that aim to profit from price anomalies between related interest rate securities.

The S&P/LSTA Leveraged Loan Index is a weekly total return index that tracks the current outstanding balance and spread over LIBOR for fully funded term loans

 

Important information

Blog header image: Kwangmoozaa/Shutterstock.com

Diversification does not guarantee a profit or eliminate the risk of loss.

Alternative investments can be less liquid and more volatile than traditional investments such as stocks and bonds, and often lack longer-term track records.

Alternative products typically hold more non-traditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money.

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This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

NOT FDIC INSURED

 MAY LOSE VALUE

 NO BANK GUARANTEE

All data provided by Invesco unless otherwise noted.

Invesco Distributors, Inc. is the US distributor for Invesco Ltd.’s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. Each entity is an indirect, wholly owned subsidiary of Invesco Ltd. PowerShares® is a registered trademark of Invesco Ltd., used by the investment adviser, Invesco PowerShares Capital Management LLC (PowerShares) under license. PowerShares and Invesco Distributors, Inc., ETF distributor, are indirect, wholly owned subsidiaries of Invesco Ltd.

©2018 Invesco Ltd. All rights reserved.

Before investing, carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. 

Selecting an alternative strategy By Invesco U.S.

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Invesco and is being posted with Invesco’s permission. The views expressed in this material are solely those of the author and/or Invesco and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


19759




Macro

PIMCO - United Nations: Creating a New Hub for Sustainable Investment Deals - By Gavin Power


The UN recently wrapped up its annual High-Level Political Forum on Sustainable Development, which brings together the 193 Member States to explore how they plan to reach the UN’s Sustainable Development Goals (SDGs). A little more than two years since their adoption, the SDGs have taken real root globally, and, importantly, are being embraced by the private sector – a trend likely to foster compelling opportunities for investors focused on environmental, social and governance (ESG) factors.

The 17 SDGs are socio-economic-environmental objectives designed to deliver prosperity to societies and economies – while protecting the planet in the process. The underlying targets and indicators give sustainability-oriented investors something they have long yearned for: a framework to measure and track impact.

This is not a moralizing UN exercise, but a serious agenda that aims to develop sustainable economies for the benefit of all, including the private sector.

Roadmaps to investment opportunities

At the recent UN forum, dozens of governments presented their SDG strategies and updates – called, in usual inscrutable UN speak, “Voluntary National Reviews.”

What’s exciting from an investor and PIMCO perspective is that these national strategies are evolving into roadmaps for investment – that is, countries are beginning to detail how they plan to finance their SDG ambitions and goals, from infrastructure to energy to education to food security. And more and more of these plans include strong references to collaborating with private finance and institutional investors.

There is no question that private-sector investment and finance will be essential as a complement to public finance in reaching the SDGs. The UN estimates that achieving the SDGs by 2030 will cost between $3 trillion and $5 trillion per year – implying an annual financing gap of at least $2.5 trillion when current public and private expenditures are taken into account.

The SDGs may well position the UN as a broker of sorts for sustainable investment deals. At the forum, numerous governments presented projects to international investors – including some who had never set foot in the UN before. Examples included Jamaica and wind farms, Vietnam and hydropower plants, and Bangladesh and water infrastructure.

While perhaps small in scale when considered individually, such projects could potentially be pooled into SDG bonds or collateralized loan obligations with different tranches.

Partnering with investment leaders

Given the palpable excitement for these projects, the UN now plans to regularly convene SDG Investment Fairs to gather the worlds of public and private finance – and, it is hoped, unlock deals that target the double dividend of investment return and positive social impact.

The UN has asked PIMCO to help design these fairs and be actively engaged as an investor during the deal-making discussions. We are excited about this opportunity and will share our key takeaways.

Learn why we believe the bond market is uniquely suited to both benefit from and provide finance for ESG-related efforts.

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PIMCO is one of the world’s premier fixed investment managers. Since our founding in 1971 in Newport Beach, California, we have grown into a global organization with more than 2,150+ professionals united in a single purpose: creating opportunities for our clients in every environment. Our focus on excellence and our short- and long-term track record has encouraged institutions, financial advisors and millions of individual investors to entrust us with their assets. Visit PIMCO’s blog.

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This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. © 2018 PIMCO PIMCO Investments LLC, distributor, 1633 Broadway, New York, NY 10019, is a company of PIMCO.

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from PIMCO and is being posted with PIMCO’s permission. The views expressed in this material are solely those of the author and/or PIMCO and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


19782




Macro

Pension Partners - Is the Fed Model a Good Valuation Tool?


Should investors use bond yields as a baseline to determine if stocks are over-or-under valued?

If you believe in the “Fed Model,” your answer is “yes.” The model instructs investors to compare the S&P 500’s earnings yield (Earnings/Price, the inverse of the P/E ratio) to the 10-Year Treasury yield:

  • If the Earnings Yield is above the Treasury Yield, stocks are said to be “undervalued.”
  • If the Earnings Yield is below the Treasury Yield, stocks are said to be “overvalued.”

With the Earnings Yield (“EY”) today currently above the 10-Year Treasury Yield (“TY”), many pundits are arguing that stocks are still undervalued (and therefore attractive), despite other metrics indicating otherwise (click here for recent post on this). Are these pundits correct? Is comparing the Earnings Yield to Treasury Yields an effective way to value stocks and forecast future equity returns? Let’s take a look…

 

Data Sources for all charts/tables herein: Robert Shiller, Bloomberg, YCharts.

Going back to 1928, we can separate EY minus TY into deciles, from lowest (-4.4% to -2.1%) to highest (7.0% to 14.9%). We can then calculate average and median forward returns over the next 1 to 10 years within each decile…

 

If you’re struggling to find a strong relationship in the above tables, that’s because there isn’t one. While the highest EY-TY decile is indeed followed by the strongest returns, the lowest EY-TY decile has above-average returns from 4 years through 10 years forward. The weakest returns reside in the middle deciles (4-7), with a slight bias to higher forward returns with higher EY-TY starting levels.

We can observe this bias in the upward slope of the trendline line in the scatter chart below, which compares the starting EY-TY levels to forward 10-Year Total Returns. The R Squared in this case is .11, meaning that knowledge of EY-TY accounts for only 11% of the variation in future 10-year returns.

 

Why is there a correlation between EY-TY and forward returns at all?

Digging into the data, we find our answer. In the highest EY-TY decile 10 which showed the strongest forward returns, the median P/E ratio of 9 was by far the lowest of any decile, and the median earnings yield of 11.1% the highest. Many of the data points were from the late 1940s and early 1950s when stocks were exceptionally cheap and bond yields were exceptionally low.

Deciles 8 and 9 also showed below-average P/E ratios.

 

So perhaps the strong forward returns in deciles 8-10 were not due to the wide spread between EY and TY after all, but simply because of the lower starting P/E ratios (or higher EY).

If this is indeed the case, we should observe a stronger relationship between EY and forward returns than EY-TY. That is exactly what we find. The R Squared between EY and forward returns moves up to .45, meaning 45% of the variation in forward 10-year returns can be explained by the starting Earnings Yield. This is significantly higher than the R Squared of 0.11 for EY-TY.

The conclusion: cheap stocks tend to be followed by above-average forward returns – and expensive stocks below-average forward returns – regardless of where bond yields are.

This makes intuitive sense, particularly when viewed in the extreme. Let’s say the 10-year Treasury Yield went negative, as was the case in recent years in both Japan and Germany, and still is the case in Switzerland. Under the “Fed Model,” that would imply that the P/E ratio could literally go to infinity and still deliver a higher Earnings Yield (E/P) than the yield on bonds. If the P/E ratio on Swiss stocks went to 1000, the Earnings Yield would be 0.10% (=1/1000), still higher than the yield on 10-Year Swiss Bonds (-0.10%).

Would you call Swiss stocks undervalued today at a P/E ratio of 1000? I rest my case.

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Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. Charlie holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and also holds the Certified Public Accountant (CPA) certificate.

In 2017, Charlie was named the StockTwits Person of the Year. He is a frequent contributor to Yahoo Finance and has been interviewed on CNBC, Bloomberg, and Fox Business.

You can follow Charlie on twitter here.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Pension Partners, LLC and is being posted with Pension Partners, LLC's permission. The views expressed in this material are solely those of the author and/or Pension Partners, LLC and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


19781




Macro

BlackRock - How to Rev Up Your Idle Cash


Not all cash is created equal: think about those dollars parked in your brokerage account.

New York City has stringent anti-idling laws for parked vehicles. The City even pays bounties for citizens who send in video evidence of people sitting in their cars with their motors running. The spirit of the law is to prevent wasting gas and to improve community conditions.

Leaving cash in your brokerage account is akin to burning fuel without getting anywhere. It’s not productive for you or your long-term investment goals. I’m anti-idling for the long-term investor. Cash is basically a zero-expected return asset class. But the reality is that there’s always going to be some cash in your brokerage account. Cash generally comes from deposits you make, proceeds from selling your investments and dividends. And some investors simply prefer having some portion of a portfolio in the safety and surety of cash.

 

Making cash on your cash

Retail brokers look to help you avoid idle cash. They typically place it in some form of interest-bearing program. Pay attention to what your broker does with your cash. When you open a brokerage account, there is usually some default position, or action, for your cash.

Some brokers place your cash into money market funds, often their proprietary, in-house funds. This allows the broker to earn fees from your idle cash. Some brokers “sweep” your cash from the brokerage into a bank, typically a bank they also own (an “affiliated” bank). These deposits are often insured by the FDIC. The bank pays you some interest rate on your “sweep” deposits, and invests your cash into higher-yielding investments (usually bonds).  The bank earns a “spread” on the difference between the rate it pays you on your cash deposits, and the rate it earns on the investments it makes using your cash.  This is called “net interest margin” or “NIM” in industry jargon. One-year U.S. Treasury yields are about 2.4% as of August 10, 2018. The bank sweep deposit interest rate in one of my accounts, with one of the top three retail brokers, was 0.22% (22 basis points) as of July 31, 2018. Although I tend not to leave idle cash in my account, that means the bank could take my deposits, buy one-year U.S. government bonds and pocket the annualized difference between 2.4% and 0.2%.

Earning revenue from your cash is one of the ways brokers make money, even when accounts are otherwise “free.” There isn’t anything inappropriate about this, but you can do a little work and find a better deal. For example, consider the management fee rate on the default-setting money market fund.  Is the fee rate competitive? There are ultra-short duration, cash-focused ETFs, like iShares Ultra Short-Term Bond ETF (ICSH), or money market funds that may offer a much lower fee than the broker’s affiliated default option. You can also look at how much the broker’s affiliated bank is paying you for the privilege of using your cash deposits. There are ample one-year, FDIC-insured certificates of deposit (CDs) that pay rates of 2.5% available if you wish to maintain more exposure to cash.  There are also high-yield savings accounts that pay annual rates of over 1% and permit more frequent, monthly withdrawals versus a locked-up, fixed-term CD. I keep an allocation to cash in case of emergency, and that money isn’t in my brokerage account.  It’s in CDs and a high yield savings account.

 

Why should you bother?

Small amounts add up to large sums over long periods—the old penny saved is a penny earned. Idling your cash is a missed opportunity, and spending a few moments maximizing the value of that cash can getting you moving instead of going nowhere.

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Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

An investment in fixed income funds is not equivalent to and involves risks not associated with an investment in cash. Money market funds typically seek to maintain a net asset value of $1.00 per share. Fixed income funds do not have a similar objective.

The iShares Ultra Short-Term Bond ETF (“the Fund”) is actively managed and does not seek to replicate the performance of a specified index. The Fund may have a higher portfolio turnover than funds that seek to replicate the performance of an index.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.

Securities with floating or variable interest rates may decline in value if their coupon rates do not keep pace with comparable market interest rates. The Fund’s income may decline when interest rates fall because most of the debt instruments held by the Fund will have floating or variable rates.

Investing involves risks, including possible loss of principal.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

©2018 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

ICR0818U-572659-1801524

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

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