Cash has diversified portfolios better than bonds, says Morningstar.
Cash has been drawing investors thanks to its attractive yields, but it also stands out as one of the best diversifiers for portfolios, according to Morningstar. Cash-equivalent investments, such as money market funds, have seen an influx of capital in recent years. Assets in the funds now sit at $7.64 trillion, according to the Investment Company Institute . While yields aren’t as high as they once were, thanks to Federal Reserve rate cuts late last year, they remain solid. The annualized seven-day yield on the Crane 100 list of the largest taxable money funds was 3.45%, as of Friday. So far this year, the central bank has been holding rates steady — and market is isn’t pricing in any more cuts this year, according to the CME FedWatch tool . “Despite recent rate cuts, yields on cash remain significantly higher than they were heading into 2022. Investors therefore have an opportunity to de-risk their portfolios without giving up too much in returns, at least in the short term,” Amy Arnott, a portfolio strategist at Morningstar, said in a new report . “Most importantly, it’s helpful to keep in mind that diversification benefits accrue, slowly and steadily, over decades and through interest-rate pivots,” she added. In fact, cash has been a better portfolio diversifier than Treasurys in recent years, she said. “The reason that cash is usually a better diversifier than investment-grade bonds, including Treasurys, is that it’s not really driven by changes in economic growth,” Arnott said in a follow up interview with CNBC. Cash has had the lowest correlation with stocks over the last three years, she noted. At the same time, bonds went the other way. When the Fed began raising rates in 2022, the correlation between stocks and bonds turned positive — meaning that bonds weren’t the portfolio ballast investors were expecting. “With 2022 in the rearview mirror, correlations between stocks and high-quality bonds have been declining, but they’re still not back to pre-2022 levels,” Arnott said. For instance, the 3-year correlation between U.S. equities and long-duration Treasury bonds was -0.35 at the end of 2021, but it sat at 0.65 at the end of 2025, she pointed out. This year, when the Iran war started in late February, once again stocks and bond prices both dropped. Bond yields move inversely to prices. Finding the best payouts There are a number of ways to earn solid income on cash, including money market funds, certificates of deposit, Treasury bills and high-yield savings accounts. Here are the yields on some of the largest money market funds. Investors can lock in income with certificates of deposit. When buying them, be sure that you don’t need the money until the CD matures — otherwise you may be paying an early withdrawal fee. You can also spread the payouts out by building a CD ladder, which is buying CDs of varying maturities. For instance, a ladder of 3 months to 14 months can give you a hedge if you need cash sooner and also offer several different options on when you can pull the cash out. Some banks, like Bread Financial and Capital One Financial , have even raised their rates recently. BTIG analyst Vincent Caintic said the increases weren’t surprising given the market’s expectations of no rate decreases this year and rising inflation. “Still, the rise of online bank deposit rates is a significant turnaround versus expectations at the beginning of 2026 for significant online deposit rate cuts,” he wrote in an April 10 note. Meanwhile, Treasury bills can also be bought in durations from 4 weeks to 52 weeks through TreasuryDirect , a website managed by the U.S. Treasury Department, or a brokerage account. They can also be laddered. In addition, there are also several T-bill funds, like the iShares 0-3 month Treasury Bond ETF (SGOV) and State Street SPDR Bloomberg 3-12 Month T-Bill ETF (BILS). The former has a 30-day SEC yield of 3.55% and an expense ratio of 0.09%, while the latter has a 3.46% 30-day SEC yield and 0.1354% gross expense ratio. SGOV YTD mountain iShares 0-3 Month Treasury Bond ETF year to date High-yield savings accounts can also be a place to stash cash, but the annual percentage rate can fluctuate. Bread Financial and LendingClub both offer 4% annual percentage yields on their accounts, the highest in BTIG’s coverage. One place not to go is traditional savings accounts, which have very low interest rates, said Arnott. If you own dividend stocks, also be aware of what is being done with that income, she advised. “If you have a brokerage account and you’re not reinvesting dividends, chances are those dividend payments are going into a … cash sweep account with a very low interest rate,” Arnott said.
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