Using Cash in ETF Sector Rotation strategy?

How can I use cash as one of the ETF’s in a Sector Rotation strategy? Currently I am using SHV as a stand-in for cash. Any help will be appreciated.
:slight_smile:

There are a number of Short-Term Treasury ETFs to choose from that can be included as Cash-Proxies in your models.

Examples include SHY, BIL, SHV, GSY, BSV, etc…

Here’s a chart showing the performance of these ETFs over the last 6 years, as compared to IEF, the 10-Year Treasury Bond (in red):

If you’re really looking for a cash proxy ETF that doesn’t appreciate, BIL might be your best bet. You can see it didn’t dip at all in the March selloff.

More possibilities can be found here: https://etfdb.com/etfs/bond-duration/short-term/

However, keep in mind that you will want to screen these ETFs for liquidity, and that’s NOT done the same way we screen stocks for liquidity. A good measure of ETF liquidity is the FactSet Analytics Block Liquidity rating, which measures how easy it is to trade a $1 million block of the ETF.

Chris

Thanks Chris. P123 have data for BIL only going back to 2007. It seems that I will have to use SHV.
But SHV had unusually high returns (4.5% - 6.5% per year) in 1999, 2000, 2001, 2006, and 2007.

Hataso -

While it’s true that BIL wasn’t created until 2007, you could use SHY as a proxy for cash, since the P123 data for SHY goes back to January 2, 1999. Here’s a simple buy-and-hold P123 Sim with BND (All Bonds) as the benchmark and SHY as the only holding — beginning in Jan. 2, 1999:

If there isn’t actual data for an ETF (because sometimes those ETFs didn’t exist when we want to start our sim), in many cases P123 has constructed “synthetic’ ETFs based on the price of the basis index (in this case, 1-3 year Treasury Bonds are the basis for SHY) back to 1999.

I’ve been a member since 2004, and have found that these synthetic prices are pretty accurate in tracking their basis index (if there was one available back to 1999).

To demonstrate a real-life use of SHY back to 2000, we offer something similar to what I think you’re building, but with only two possible positions (SPY or SHY). Our “S&P 500 Conservative Strategy” holds the S&P 500 ETF (SPY) about 70%-80% of the time, but switches at times of elevated risk into SHY, thereby minimizing drawdowns and producing gains every year for the past 20 years. Trades are minimal, with an average hold time of 12.7 months:

Chris