Yields on the $7 trillion parked in money market funds may soon be coming down.

Market participants anticipate the Federal Reserve will cut its benchmark interest rate, and that could happen as quickly as the Sept. 16 Federal Open Market Committee meeting. It may be hard to budge clients from their cash hoard since inertia has worked in their favor, but advisors are certainly rethinking their strategies. “It’s been a great period of performance for those investors. So it’s hard to point fingers and say you’ve made a mistake,” said Rebecca Venter, senior fixed-income product manager at Vanguard.

But reinvestment risk is building, she said, noting that fixed-income markets are pricing in a Federal Funds rate that’s a full percentage point lower than the current range of 4.25% to 4.50%. The current effective Fed Funds rate is 4.33%. When the cuts begin, “it will flow through into these short-term rates very quickly,” she said. As such, some advisors are talking to clients about their next steps.

“This is exactly what we’re discussing with clients,” said Jason Fannon, senior partner at Cornerstone Financial Services, who added that he is looking at a range of fixed income options, from certificates of deposit to corporate bonds.

Strawberry Yields Forever

It’s a good time to lock in yields, Venter said. Even if an advisor bought an exchange-traded fund that tracks the Bloomberg US Aggregate Bond Index, yields are historically high. “You’re getting a yield in the 70th percentile. So yields have only been higher 30% of the time than now. This is a really attractive yield, close to 4.5% overall for very high-quality fixed income,” she said.

Fannon said he’s waiting for the first Fed rate cut to be on the books before implementing any new positions, pointing out that markets had anticipated rate cuts earlier this year that never materialized. For his most conservative clients, he’s building CD ladders, usually a one-to-five-year ladder or out to seven years. He may also look at fixed annuities but is sticking with double- or triple-A-rated insurance companies.

Also wary of duration and credit risks, he’s staying in the short and intermediate parts of the yield curve and sticking to high quality. Fannon is using ETFs including Vanguard Short-Term Treasury Index ETF (VGSH) and Vanguard Intermediate-Term Treasury Index ETF (VGIT) for liquidity and Vanguard Short-Term Corporate Bond Index ETF (VCSH) and Vanguard Intermediate Corporate Bond Index ETF (VCIT) for corporate bonds.

Maggie Kulyk, CEO at Chicory Wealth, works with socially conscious investors, and is looking beyond US Treasurys for bond exposure. “We cater to an extremely politically progressive crowd. They’ve been looking for alternatives to Treasurys, not just because of interest rates, but because of their, for lack of a better term, mistrust of this government,” they said.

One of those alternatives is community development financial institutions, where they recently bought two-year notes yielding 4.5%, which they said “could look really good by the time we get to the end of 2027.” They are also buying high-quality municipal bonds for clients in the highest tax brackets, where tax-free yields are above 7%. One fund they are using is MFS Municipal Income Fund (MFIAX).

Zone Defense

Steve Conners, founder and president of Conners Wealth Management, prefers to put cash to work in undervalued stock sectors for clients who have a longer-term horizon, especially if they are younger. He’s looking at defensive sectors, dividend payers and small caps for value plays.

For his conservative clients, Conners likes telecommunications companies such as AT&T (T), Verizon (VZ) and T-Mobile (TMUS) for their price appreciation and dividends, with Verizon having a yield of over 6%. He also likes electric utilities, specifically, Sempra Energy (SRE), Duke Energy (DUK), American Electric Power (AEP) or Southern Company (SO) for their yields that come in around 3.3% and their wide moats. “Electric utilities are defensive in nature, but they’re doing well in this environment. AI (artificial intelligence) demand is only going to increase the need for electricity,” he said.

He’s also looking at small-cap stocks, noting the Russell 2000 index remains widely undervalued versus large caps. “If the Fed is going to be cutting rates, small caps should do well. The Russell 2000 has been performing well of late,” he said.

Alternate Universe. With valuations in parts of the public markets lofty, some advisors are looking to alternatives for income. John Rasic, financial advisor at Signature Estate and Investment Advisors, said he is looking at a few alternative investments. For fixed-income exposure, he is looking at private credit, such as higher quality middle-market lending funds, which offer yields of about 8.5% to 9% without taking on much credit risk.

Another option for income-seeking investors is master limited partnerships, which are at play between 6% to 8% dividend, he said. Infrastructure is also a new addition for Rasic, and it is appropriate for taxable accounts because of the return of capital aspect on the distribution. “You’re getting close to maybe 10% but for 10 years, essentially that distribution returns capital,” he said.

Kulyk is also seeking to diversify away from public markets when appropriate and is seeking out impact-focused direct investments. The platform Citizen Mint brings impact deals with initial investment levels of $50,000 to $100,000, versus the usual minimum investment of $250,000 and above for these types of deals, they said.

For example, last year they invested in a four-year financing deal for solar arrays to connect to the electric grid. The target net internal rate of return is 15.5%, with target annual cash distribution of 6.5%. While some of the deals require investors to be qualified or accredited, these deals are “a great diversifier away from the volatility of public markets, but also deliver nice income,” Kulyk said.