CSHI vs. SGOV: Navigating the Yield Drop in a Low-Rate Environment

In a world where short-term Treasury yields have dwindled to historically low levels, income-focused investors face a critical question: How to allocate cash reserves to balance risk, cost, and return? The answer lies in dissecting the merits of two ultra-short duration ETFs-NEOS Enhanced Income 1-3 Month T-Bill ETF (CSHI) and iShares 0-3 Month Treasury Bill ETF (SGOV)-through the lens of strategic cash allocation. This analysis argues that CSHI, despite its higher expense ratio, offers a compelling edge over SGOV in a low-rate environment, leveraging active management, yield enhancement, and tax efficiency to outperform its passive counterpart.

Market Dynamics: A Low-Rate Landscape Demands Innovation

The Federal Reserve's cautious approach to rate cuts in 2025 has left investors grappling with a rangebound yield environment. As of December 2025, the 10-year Treasury yield hovers near 3.9%, while the Fed funds rate is projected to fall to 3% by mid-2026. In such a climate, traditional cash equivalents like money market funds or short-term Treasuries struggle to deliver meaningful income. Investors must now prioritize strategies that amplify yield without sacrificing liquidity or safety.

LPL Research underscores this challenge, noting that fixed income portfolios should adopt a "neutral duration" stance while favoring high-quality bonds over cash as yields decline. This aligns with J.P. Morgan's broader recommendation to treat bonds as a hedge against growth slowdowns, even as correlations with equities rise. For income-focused investors, the key is to identify instruments that optimize yield within a low-risk framework-a niche where CSHI's active strategy shines.

Fund Fundamentals: CSHI's Edge in Yield and Performance

CSHI distinguishes itself through a dual approach: investing in 1–3 month U.S. Treasury Bills and overlaying a put spread strategy on the S&P 500 to enhance returns. This "cash-plus" model generates a distribution rate of 5.42% as of January 2025, significantly outpacing SGOV's 4.20% yield. While SGOV passively tracks short-term Treasuries, CSHI's active management-adjusted weekly- seeks to mitigate duration risk while capturing incremental income.

Performance metrics reinforce this differentiation. Since its August 2022 inception, CSHI has delivered total returns of 19.33% through December 2025, outperforming SGOV's 16.47% over the same period. This edge stems from CSHI's ability to adapt to market conditions, as seen in its resilience during the Q3 2025 bond market rally. However, investors must weigh these gains against CSHI's higher expense ratio of 0.38% versus SGOV's 0.09%, a trade-off justified by its yield-enhancing strategy.

Risk Considerations: Balancing Act in a Volatile Environment

Critics of CSHI often highlight its exposure to options risk, as evidenced by a temporary drawdown in April 2025. Yet, this risk is mitigated by the fund's conservative put spread strategy, which limits downside while preserving liquidity. Both CSHI and SGOV maintain ultra-short durations, ensuring minimal sensitivity to interest rate fluctuations. However, CSHI's active management introduces a layer of complexity absent in SGOV's passive structure.

For risk-averse investors, the tax efficiency of CSHI adds another dimension. A portion of its distributions is classified as return of capital, reducing taxable income while maintaining cash flow. This feature becomes increasingly valuable in a low-rate environment where taxable yields are scarce.

Strategic Rebalancing: Timing the Shift to CSHI

The case for rebalancing toward CSHI hinges on three factors:
1. Yield Arbitrage: CSHI's 5.42% distribution rate offers a 29% premium over SGOV's 4.20%, a gap that widens as short-term rates remain constrained.
2. Cost-Benefit Analysis: While CSHI's 0.38% expense ratio is higher, its active strategy generates alpha that offsets the cost differential.
3. Market Positioning: With the Fed's balance sheet expansion and temporary reserve management purchases (RMPs) supporting short-term yields, CSHI's options-based approach is well-suited to capitalize on volatility without extending duration.

Investors should also consider the broader macroeconomic context. Historical patterns suggest that 10-year yields may dip further in the second half of 2026, making now an opportune time to lock in higher yields via CSHI's structure.

Conclusion: A Case for Active Income Generation

In a low-rate environment, the choice between CSHI and SGOV is not merely about yield but about strategic allocation. CSHI's active management, tax efficiency, and performance track record position it as a superior alternative for income-focused investors seeking to outperform cash equivalents. While SGOV remains a safe harbor, its passive approach lacks the innovation needed to thrive in a yield-starved world. For those prioritizing capital preservation with enhanced returns, CSHI represents a compelling rebalancing opportunity.