An investor’s guide to StashAway’s USD Cash Yield portfolio

By now, Malaysians are used to seeing foreign currencies appreciate against the ringgit. There’s a familiar, disheartening feeling that we endure: seeing our purchasing power erode, while feeling like there’s nothing we can do about it.

The US dollar has appreciated 58% against the ringgit since mid-2011, most notably during the 2014 to 2015 period, when the ringgit fell 24%. Based on this long-term observation, it’s clear that Malaysian investors need to diversify their cash holdings, and hedge against further ringgit weakness.

Compounding this, most investors have a home bias, with the majority of their net worth denominated in ringgit. This adds to the importance of further diversifying, by investing overseas or by holding cash in different denominations. 

Through StashAway’s USD Cash Yield portfolio, US Treasuries are a great way to get exposure to the US dollar while also enjoying a high yield. US Treasuries are a safe investment – they’re backed by the US government – and the short-term nature of these 1 to 3 month bonds make them less exposed to volatility. Plus, US interest rates are now at 23-year highs, making the yield on these US Treasuries – 5.3% p.a. at the time of writing – very attractive.

Keen investors should understand that there are two components to the performance of the USD Cash Yield portfolio, which make up the overall portfolio’s return:

1. Yield to maturity

The return investors earn from coupons, or annual interest payments, if these US Treasuries are held to maturity (not sold until the bond is repaid). As US interest rates rise, so do Treasury yields, and vice versa.

2. Foreign exchange rate fluctuations

As a foreign currency, the exchange rate between the US dollar and the ringgit fluctuates according to demand and supply. Several factors influence the exchange rate, including the health of the respective economies and how high interest rates are in those countries. The recent strength in the US dollar has a lot to do with how high US interest rates have become, relative to other countries. Since the Federal Reserve’s aggressive rate hikes began in early 2022, the US dollar has strengthened 11.5% against the ringgit.

For illustrative purposes, if in a one year period, the yield amounts to 5%, and the US dollar weakens against the ringgit by 2%, the overall return is 3%. Alternatively, if the yield amounts to 5%, and the US dollar strengthens against the ringgit by 2%, the overall return is 7%. Because of this, the yield component can act as a buffer against losses, or as an enhancement to foreign exchange returns.

As the USD Cash portfolio is exposed to foreign exchange risks, investors should look to invest for the long term. Investors can use this portfolio to get exposure to the US dollar over the long term, and not for short-term forex (foreign exchange) trading. Think of this portfolio as a tool for long-term goals where the spending is in a foreign currency, like overseas education for your kids. 

This portfolio shouldn’t be seen as a means of saving for emergencies, or for day-to-day spending, due to its short-term volatility. If the US dollar weakens against the ringgit to an extent which is more than the yield, that could result in negative portfolio performance. One way of diversifying your entry points is to dollar-cost average, which reduces the timing risk of investing at the top.

Investors should use this portfolio to get exposure to the US dollar over the long term, and not for short term foreign exchange trading. This portfolio can be used to invest for long term goals where the spending is in a foreign currency, like holidays abroad or kids' education overseas.

This article was written on 13 March 2024, when the exchange rate was RM4.68/US dollar.