Are you holding the right amount of cash, and is it in the right place?

The rise in rates in the past two years has sparked the need for advisors to reexamine the role of their clients’ cash allocations. How much cash is right, and what cash-like vehicle may be best suited? Probing these questions is a potential opportunity for advisors to add value. 

The clear liquidity of cash makes it a default for investors in funding near-term needs—from emergencies to down payments on a car or house and even for keeping dry powder for their portfolio to reallocate to risk assets opportunistically.

Every situation is different, but if such goals are well funded or if investors tolerate modest risk, they could be holding too much cash. Not all cash and cash substitutes are the same, and investors have a bigger spectrum of choices than ever before, each with its own pluses and minuses. Even though cash balances have risen in line with rates in the past two years, the market’s overall allocation to cash has held steady around 20% over the last 15 years.¹

Some highly liquid investments, such as short-dated bond ETFs or Treasury bills, can generate more yield than a bank account and constitute only a modest increase in risk. They also likely have the liquidity necessary to buy or sell—a potentially important characteristic considering that yields on savings accounts have barely budged since 2022.

So, how much cash is right for clients?

Looking at a client’s cash allocation through the lens of how it meets their spending goals is a logical place to start.

On one end, basic living expenses are best covered by highly liquid assets like cash, money market funds, and ultra-short bond ETFs. Using inflation-hedged assets for future living expenses can help ensure that funding vehicles keep up with ever-increasing costs.

And on the other end, investor goals focused on additional discretionary spending needs, such as vacations or legacy purposes like donating to charity, might be met with relatively riskier asset classes, such as equities, private assets, or real estate.

Some investors may be more risk-averse or have shorter time horizons, while others may lack optimal asset allocations. Investors who fit only one or neither of these two profiles might benefit from holding more bonds instead of cash to achieve higher yield.

As we’ve detailed in research, clients with lower risk tolerance,  shorter time horizons, or a better funded portfolio relative to the target may find it more appropriate to have a higher cash allocation in their portfolio.

What alternatives to cash may be right for my client?

Ultra-short term bond ETFs are a growing alternative that could provide many of
the core advantages that investors prioritize with their cash holdings, including relatively attractive yields and comparatively low volatility.

At the same time, ultra-short bond ETFs have the requisite liquidity to potentially enable other advantages, including speed of rebalancing and more seamless integration into the rest of the portfolio.

While it’s important to note that ultra-short bond ETFs are not cash and have some price volatility, some of the largest ETFs on the market are government-only and offer very low duration—both of which can help to minimize volatility.

Ultra Short-term Vanguard ETFs^® with ample liquidity

For investors who are considering options to capture today’s higher yields with lower risk, two new Vanguard ultra-short Treasuries ETFs are worth considering.

The two funds, Vanguard 0–3 Month Treasury Bill ETF (VBIL) and Vanguard Ultra-Short Treasury ETF (VGUS), have limited credit and limited duration risk, and are highly liquid. Both offer targeted and diversified exposure to the very short end of the U.S. Treasuries curve, each with an estimated expense ratio of 0.07%.¹

The relatively high liquidity of ETFs represents clear benefits to investors. With ETFs, investors can readily:

• Implement or adjust investment exposure with relative ease.
• Reinvest coupons automatically.
• Set up dollar-cost averaging.
• Achieve lower access costs compared to individual bonds or mutual funds.
• Execute large block trades with relative ease.
• Enjoy low maintenance that precludes monitoring a portfolio of individual bonds.

By using low-cost, liquid ETFs—like VBIL or VGUS—investors can potentially earn higher yields for specific time horizons without taking on excessive duration risk,
while maintaining the ability to quickly enter and exit positions at modest costs.

1 VBIL and VGUS launched on February 11, 2025, and will have estimated expense ratios in their first year.

For more information about Vanguard funds or Vanguard ETFs, visit advisors.vanguard.com or call 800-997-2798 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so,
the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

All investing is subject to risk, which may result in loss of principal. Be aware that fluctuations in
the financial markets and other factors may cause declines in the value of your account. There
is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. It is possible that tax-managed funds will not meet their objective of being tax-efficient.

Investments in bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions
of an issuer’s ability to make payments.

U.S. government backing of Treasury or agency securities applies only to the underlying securities and does not prevent share-price fluctuations. Unlike stocks and bonds, U.S.
Treasury bills are guaranteed as to the timely payment of principal and interest.

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