ResearchHow We Rebalance Smart Cash.

How We Rebalance Smart Cash.

Apr 22, 2024

As you know, the goal of Titan Smart Cash is to maximize your after-tax yield on cash at any given moment in time.

We conduct daily rate scans across our investable universe of cash alternatives in an effort to ensure that your cash is working as hard as possible. In the event that a higher rate is found, we have the ability to rebalance you into that higher yielding offering to ensure you're receiving the highest rate possible.

As yields have evolved, a few savvy clients have reached out wondering "Why haven’t I been rebalanced into the highest yielding option?"

We’re all about transparency at Titan, so let’s dive into the technical details to explain 'the why'.

Our Smart Cash algorithm is built to systematically maximize your after-tax yield on cash. Our Smart Cash software:

1.) Estimates your tax rate based on your latest personal tax details

2.) Calculates the after-tax yield that you would earn across available money market mutual funds and Titan Cash Reserve

3.) Identifies which fund has the highest anticipated annual after-tax yield for you - we’ll call this “best yield”

3a. If the “best yield” is greater than .05% the annual yield of the fund you’re currently in, then we switch to the higher yielding option. It's important to note: a rebalance like this results in up to 3 business days out of the market given the settlement times of money market funds

3b. If the "best yield" does not satisfy 3a, Titan will not conduct a rebalance and you'll stay in the current fund

Part 3a. is the culprit of why you may not be invested in the highest yielding fund you currently see on Titan, and we feel good about that.

Let’s talk through why.

Estimated After-Tax Yields of Money Market Funds.

So, where are we today?

The after-tax yields of GABXX and VUSXX are extremely close - in fact, they are within .05% of each other.

What would happen if we lowered our threshold for switching, so that we’d more tactically rebalance clients into the highest yielding fund more often, rather than waiting to hit a .05% threshold?

With backtesting, we can see see how performance over the past year would have been impacted by the average after-tax yields of Titan Smart Cash if we lowered this threshold.

In a world where you could instantly switch funds with no settlement time, it makes sense to have no threshold for switching funds.

But when accounting for real-world constraints, even just a one-day lag (i.e. T+1) incurs an opportunity cost of sitting out of the market for too long. We feel that our switching threshold of .05% strikes a nice balance, allowing us to tactically switch in the current rate environment, while also considering the opportunity costs incurred by settlement times.

As clients have pointed out, there must be some amount of time that could pass in which it would have been better to be in the absolute highest yielding fund, even within .05% right?

That’s true – let’s dig into it:

Imagine that you are invested in Vanguard’s VUSXX with all of the assumptions we’ve used above.

As of 4/8/24, this is the second highest yielding fund in Titan Smart Cash on an after-tax basis, and you haven’t been “switched” because the highest yielding fund, GABXX, is only higher by ~0.01%.

VUSXX Estimated After-Tax Yield: 3.42%

GABXX Estimated After-Tax Yield: 3.43%

Assume that you did switch funds, leaving you out of the market for a relatively speedy 1 business day (in practice, settlement times may be longer).

If after-tax yields stay exactly the same going forward, it would take more than 500 trading days to make up for the yield forfeited from even just one day out of the market.

This is because the difference between earning ~3.4% yield vs. earning 0% while out of the market is much larger than the difference between the two highest yielding funds. That’s why we feel it’s important to incorporate a small .05% threshold to keep you earning yield.

We take our client feedback and questions to heart, and are constantly exploring new improvements to all of our offerings.

Most importantly, we want to make sure that everything we offer is not just a good investment in theory, but in practice.

This is just one example of some of the work we are doing behind the scenes as we help find our best after-tax yield for you.

If you have any questions or feedback, feel free to reply directly to this email - we love hearing from clients and are happy to help any way we can.

- Your Titan Team

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