Investors worried about an equity market downturn are increasingly parking money in ultra-short bond funds and money market ETFs, a shift driven by poor returns from long-term Treasurys and near-zero yields on bank deposits, according to financial advisors and fund flow data.
Stock markets have delivered double-digit annual gains for most of the past decade, powered recently by the “Mag 7” tech stocks and the AI boom. But that run has made many investors nervous about downside risk, said Christopher Coolidge, chief investment officer at Brookwood Investment Group in Phoenix.
“Investors have enjoyed one of the strongest equity markets in history, and they’re starting to get worried about downside risk,” Coolidge said.
The traditional safety trade of long-term bonds has not been working. The iShares 20+ Year Treasury Bond ETF (TLT) posted an average annual return of negative 6.7% over the past five years, while the iShares 7-10 Year Treasury Bond ETF (IEF) averaged a 1% annual decline, according to the source.
Rising cash allocations
Brookwood has increased the cash portion of its model portfolios to about 5% from roughly 2% in June. “We’ve become more defensive as equity markets continue to hit all-time highs,” Coolidge said. For that cash sleeve, Brookwood builds a basket of ultra-short ETFs, combining Treasury exposure, floating-rate securities, actively managed credit and option-enhanced income strategies. Clients can choose to be 100% invested in that basket, or 50% or 20%, depending on their comfort level.
Other advisors are taking a similar approach. Cyrus Amini, chief investment officer at Hyphen Wealth Management in Lafayette, California, uses a mix of short-duration bond funds and money market funds for liquidity. “I don’t see the need to take duration risk in this market,” he said.
Why ultra-short funds are attracting billions
Ultra-short bond funds, which invest in fixed-income securities with maturities typically under one year—including government bonds, investment-grade corporate debt, asset-backed securities and commercial paper—are proving popular as a parking spot. These funds pulled in $12.8 billion in July, according to Morningstar Direct.
The appeal is yield with limited rate risk. “The ultrashorts are adding anywhere from 75 to 110 basis points over money market ETFs with comparable duration and interest rate sensitivity,” Coolidge said.
Morningstar names the Baird Ultra Short Bond Fund (BUBIX) and the JPMorgan Ultra-Short Income ETF (JPST) among the best ultra-short bond funds for 2026.
Money market ETFs gain traction
For investors who want even less interest-rate risk, money market ETFs are an option, though they are still a relatively new and small corner of the market. The first money market ETF began trading in 2024, and only nine exist in the U.S., said Daniel Sotiroff, associate director of ETF and passive strategies research for North America at Morningstar Research Services.
Their assets totaled $24 billion at the end of July, versus $7.7 trillion held in money market mutual funds, according to Morningstar data. But flows are picking up: From January through July, money market ETFs saw net inflows of $18.7 billion, compared with $2.8 billion for money market mutual funds, per Morningstar Direct. The largest money market ETF, the ProShares GENIUS Money Market ETF (IQMM), had $17.4 billion in assets at the end of July.
Rebalancing and caution
Amini noted that the equity run-up has thrown many investors’ target allocations out of balance, making it a good time to rebalance and reduce risk. He has been talking with clients about locking in gains by moving some equity proceeds into money market funds or ultra-short bond funds. “I would rather be more prudent ahead of time than worry about things once a potential drawdown has occurred,” he said.
Goals matter too. “If you plan to make a down payment on a house in eight months, that money shouldn’t be in the stock market,” said Mike Bisaro, president and chief executive at StraightLine, an investment advisory firm in Troy, Michigan. He added that ultra-short bond funds or money market funds at least do a better job of preserving buying power than a bank account. “They’re at least doing a better job of holding your buying power than a bank where you’re effectively losing money,” Bisaro said.
Despite the recent flows, the overall share of assets in money market funds has been relatively stable since the pandemic, hovering around 18% to 20% of total fund assets. At the end of June, roughly 64% of money was in stock funds, 18% in bond funds, and 17.5% in money markets, according to Morningstar data.
Advisors caution against going all-in on cash. “The problem with going completely to cash is that you’ve introduced the element of timing to your portfolio,” Bisaro said. Investors who say they’ll reinvest when markets improve face the challenge that “who’s to say when that will be?”
Source: www.cnbc.com — https://www.cnbc.com/2026/08/15/cash-money-market-funds-bonds.html
This article is for informational purposes only and does not constitute financial, investment, tax, or legal advice. Do your own research and consult a licensed professional before making financial decisions.
