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Jose Luis Gonzalez | Reuters
Stock markets are headed for an inevitable decline, and long-term bonds are 10 year treasury It does not provide the diversification benefits that it traditionally provided within a portfolio.
Stock market returns have been strong over the past decade. S&P500 index It has delivered double-digit returns for most of the past decade. The last few years have been particularly strong, helped by the Mag7 technology stocks and the AI boom.
“Investors are enjoying one of the strongest stock markets in history and are starting to worry about downside risks,” said Christopher Coolidge, chief investment officer at Brookwood Investment Group in Phoenix.
Bank deposits are barely paying out with average yields well below 1% as investors part with their money, and long-term bonds are suffering losses in an uncertain interest rate environment. iShares 20+ Years Government Bond ETF (TLT) For example, the 7-10 year Treasury ETF (IEF) recorded an average annual decline of 1%.
Investors are looking for other safe trades to beat inflation. Short-term investments are attracting increasing attention because of their attractive yields and low downside risk.
How much is transferred to cash-like investments?
Some financial professionals are moving a large portion of their clients’ portfolios into cash-like investments. For example, Brookwood Investment Group’s model portfolios typically consist of about 5% cash. This is up from about 2% in June. “We’re becoming more defensive as the stock market continues to hit record highs,” Coolidge said.
For the cash portion of the portfolio, Brookwood creates a basket of ultra-short-term ETFs that combines ETFs with government bond exposure, floating rate securities, active credit management and option-enhanced income strategies. Customers can choose to invest 100%, 50% or 20% in the ultra-short basket for a while, depending on their comfort level, Coolidge said.
Cyrus Amini, chief investment officer at Hyphen Wealth Management in Lafayette, Calif., also uses a mix of short-term bond funds and money market funds for liquidity. “I don’t see a need to take duration risk in this market,” he said.
Why ultra-short bond funds are big winners
Investors often turn to bond funds when concerned about the stock market, but even here there are concerns beyond the recent poor performance numbers. Coolidge said long-term interest rates in the bond market have become more volatile due to inflation concerns, geopolitical concerns and expectations that the Federal Reserve may need to raise rates by the end of the year. However, recent inflation data, combined with unexpectedly soft job market data, reduce the market’s probability that a rate hike is imminent.
But ultra-short-term bond funds are becoming increasingly popular as a place to store short-term money. These funds invest primarily in debt securities with maturities typically less than one year. This includes investments in government bonds, investment grade corporate bonds, asset-backed securities, and commercial paper.
Ultra-short-term bond ETFs saw $12.8 billion in inflows in July, according to Morningstar Direct. According to financial strategists, these funds offer slightly higher yields than money market ETFs and mutual funds, but are only slightly more risky. “Ultrashorts are up 75 to 110 basis points relative to money market ETFs of comparable duration and interest rate sensitivity,” Coolidge said.
According to Morningstar, the best ultra-short bond funds to buy in 2026 include the Baird Ultra-Short Bond Fund (BUBIX) and the JPMorgan Ultra-Short Income ETF (JPST).
Money market funds eliminate interest rate risk
Very short-term bond funds still involve some degree of interest rate risk. If that concerns investors, they can also buy money market ETFs or mutual funds instead. “It’s all about your comfort level,” says Brian Huckstep, chief investment officer at Adobezon Investment Management in Lisle, Illinois.
Although money market ETFs are still relatively new, they are growing in popularity. The first of these ETFs will begin trading in 2024, and there are only nine in the U.S., said Daniel Sotilov, associate director of North American ETF and passive strategies research at Morningstar Research Services. The scale is small compared to peer investment trusts. At the end of July, the nine ETFs collectively had $24 billion in assets, compared with $7.7 trillion in money market mutual funds, according to Morningstar data.
Nevertheless, net inflows into money market ETFs have been positive every month since their inception except June and July 2026, and are gaining momentum, according to Morningstar Direct. From January to July, money market ETFs had net inflows of $18.7 billion, while money market mutual funds had net inflows of $2.8 billion.
The largest money market ETF is ProShares GENIUS Money Market ETF (IQMM). The fund had $17.4 billion in assets at the end of July, according to Morningstar Direct.
Focus on rebalancing to reduce risk after stock prices rise significantly
Amini added that the sharp rise in stocks means that many investors’ target asset allocations are off, making it a good time to be cautious about rebalancing to reduce portfolio risk. Amini said this could mean investing more in short-term bonds and money markets, with the idea that you win if your investment returns are slightly above inflation. He’s been spending more time talking to clients about taking profits, gradually taking some of their stock profits off the table and into money market funds and very short-term bond funds. “I’d rather be cautious up front than worry about a potential decline after it happens,” he said.
Another reason clients want to shift away from stocks is because their goals have changed. “If you’re going to make a down payment on a house within eight months, you shouldn’t put that money in the stock market,” says Mike Bisaro, president and CEO of Straightline, an investment advisory firm in Troy, Michigan. However, investors should feel comfortable investing in very short-term bond funds and money market funds. “They’re doing a better job of preserving purchasing power than the banks, which are at least effectively losing money,” he said.
Never just “go to cash”
Mr. Sotilov said money market funds’ share of assets has remained relatively stable compared to stock and bond funds since the aftermath of the coronavirus pandemic, although investors have turned to safer investments. In the past few years, the proportion of funds invested in the money market was around 18% to 20%. At the end of June, about 64% of funds were in stock funds, 18% in bond funds and 17.5% in money markets, according to Morningstar data.
Investors should not try to time the market. You should also maintain a healthy proportion of stocks in your portfolio based on factors such as age, assets, debt, and risk tolerance. “The problem with going all-cash is that you’re introducing an element of timing into your portfolio,” Bisaro says. Investors sometimes say they will reinvest in stocks when things get better. “Who can say when that will be?”
