Software!

For years, savers earned next to nothing on cash. Money sitting in a bank account generated little return, while borrowing costs were historically cheap. But in today’s environment, higher interest rates have created an opportunity that many people overlook: interest arbitrage.

At its core, interest arbitrage simply means borrowing money at one rate while earning a higher rate elsewhere. In other words, you are using the spread between two interest rates to your advantage. While this sounds sophisticated, many households and business owners can apply versions of this strategy in everyday financial planning.

A simple example is someone with a low fixed-rate mortgage from 2020 or 2021. If you refinanced into a 2.75% or 3% mortgage during the pandemic, aggressively paying that loan off may not actually be the best mathematical decision today. Why? Because cash sitting in a high-yield savings account, money market, or Treasury bill may be earning 4%–5% or more.

If your mortgage costs 3% annually and your cash earns 5%, you are effectively creating a positive spread. Instead of rushing to eliminate inexpensive debt, some investors may choose to preserve liquidity and let cash work harder.

The same principle applies to auto loans, business credit, and even securities-backed lending. Imagine an investor carrying a fixed loan at 3.5% while earning 5% on short-duration fixed-income investments. The spread is not enormous, but over time, compounded returns and cash flow flexibility can add meaningful value.

However, interest arbitrage is not free money, and this is where many people misunderstand the concept.

First, taxes matter. If you earn 5% interest in a taxable account, you are paying taxes on that income. Suddenly, your after-tax return may fall much closer to the cost of borrowing. Second, rates change. A high-yield savings account paying attractive yields today may not pay the same rate next year if the Federal Reserve cuts interest rates.

Third, and perhaps most importantly, risk matters. Some investors take the idea of arbitrage too far by borrowing against assets to chase speculative returns. Borrowing at 5% to invest in stocks hoping to earn 10% is not true arbitrage — it is leverage and market speculation. Markets do not move in straight lines, and volatility can quickly turn a “smart spread” into a painful lesson.

That is why financial planning matters. Interest arbitrage works best when applied conservatively, intentionally, and with liquidity in mind. It is not about maximizing risk. It is about maximizing efficiency.

For retirees or high-net-worth investors, this strategy can also become a cash-flow tool. Instead of liquidating appreciated investments and triggering capital gains taxes, some may temporarily borrow against assets while earning competitive yields on cash or waiting for a better tax year to sell investments. Likewise, business owners may choose to finance equipment at low fixed borrowing costs while preserving capital for expansion or opportunities with higher expected returns.

The bigger lesson is this: not all debt is bad, and not all cash is lazy.

Too often, people are taught that the goal is to eliminate every liability as quickly as possible. While reducing debt is certainly important, financial planning is about optimization, not absolutes. A 22% credit card balance should be paid off immediately. A 2.9% fixed mortgage in a 5% interest-rate environment deserves a more nuanced conversation.

Money should always have a job. Sometimes that means paying down debt. Other times, it means strategically keeping inexpensive debt while allowing your savings to compound at a higher rate.

The key is understanding the math, the tax implications, and your personal financial goals before making a decision. Interest arbitrage is not about gaming the system — it is about making smarter, more intentional choices with the capital you already have.

In a world where interest rates matter again, financial efficiency matters again too.

Click here to schedule a meeting — I’m here to help you take the next step toward financial freedom.

Colin Symons, CIO Lloyd Financial Group

It’s true that managing to find a security that doubles or more in a short time span is absolutely wonderful. It’s pretty easy to look back and say, “boy, I wish I’d just put my whole portfolio in that.” The thing is, that’s always a lot easier to say in retrospect than it is at the time.

The problem is that those gigantic returns only come when you’re taking outsized risk. That’s why a standard industry response is to weight your investments by risk. Safe stocks get a larger allocation, and risky stocks are sized smaller. I tend to do that myself, with the only qualification being that I’m willing to let winners run for quite a while as long as the thesis is playing out.

There are certainly funds that do take outsized bets and win. That’s great, but I think you should at least be aware of survivorship bias. You hear about the big winners, not the big losers. Also, there are plenty of managers who do great for a while, but when trends change, they fail to adapt and die. Evolution is a harsh mistress.

Why is the industry standard to spread risk through diversification? Modern Portfolio Theory basically claims “diversification is the only free lunch” because it allows you to lower risk for the same return. Thus, you can reduce left-tail risk, or in English, lessen the odds you may die broke. Particularly from a fiduciary standpoint, that sounds pretty good.

What could that look like? I think Friday’s market action is a good microcosm of what diversification can look like. Lately, high-beta names like semiconductors and space stocks have driven some impressive returns. That’s been great if you’re in those spaces, that changed notably on Friday, with those recent returns disappearing, at least from a relative return perspective.

On the flip side, something like software names have largely been a source of funds, lately, but saw a big reversal on Friday, with the software ETF (IGV) up over 6% while the market was only up 0.2%. Thus, performance flipped on Friday, which you can see in the chart below, which maps the semiconductor index over software.

We own both sides of the trade. We got into semis and space stocks a while ago and have been buying more software names lately. Earlier in the week, we were winning on semis and space, Friday we won on software. Of course, the outperformance is nice, but the diversification also helps minimize max loss days.

It’s easier to stick to the portfolio if there are few days that look bad. On the downside, there’s often something that’s not working out at the time. That’s a common trade-off with diversification. If what you’re invested in isn’t well correlated, it’s likely to behave differently, so different sections of the portfolio will provide performance at different times.

Generally, my hope is that semiconductors, space stocks, and the like provide near-term outperformance. They’ve been going up for quite some time, and I worry they may not have much move left in them, which is why we did some trimming this month. A strong surge upward could be used to clear out more.

Meanwhile, I think software, and other forgotten areas, can provide outperformance over longer time periods. Another part of diversification is to have different time horizons. I’m not positive there’s much left in the semi space, but we already have some areas that can provide performance for the future. For most people who don’t want to take excessive risk, diversification can get you to your financial goals more safely.

Chicago PMI was 62.7 vs. exp. 50.3, with New Orders and Production strong. No slowdown, here.

The Goods Trade Balance was -$82B vs. exp. -$87B. That should help GDP numbers, as exports have been good. Chances are oil is a good part of that.

Retail Inventories were up 0.6% m/m, same as last month, while Wholesale Inventories were up 0.5% vs. exp. 0.6%. We have seen a bit of an inventory build, lately, which is not a huge shocker with the Iran chaos.

Nasdaq implied correlation is the lowest ever, which is just a fancy way of saying individual components aren’t moving together very much.

Oil was down -19% in May, the biggest monthly loss in six years. The market thinks an Iran deal should happen. It is up 4% today, though, as the US and Iran trade deal drafts, and some rockets.

NVDA is up 2% after unveiling a new ARM CPU chip. This is also hitting processor stocks like INTC,AMD, AAPL, and QCOM. ARM is up 14% on the news.

ISM Manufacturing and Construction Spending, today.

Bottom line: Iran dealmaking trudges on.

Click here to schedule a meeting — I’m here to help you take the next step toward financial freedom.

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This content is intended to provide general information about Lloyd Financial. It is not intended to offer or deliver investment advice in any way. Information regarding investment services are provided solely to gain an understanding of our investment philosophy, our strategies and to be able to contact us for further information.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

Past performance is no guarantee of future returns.

Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable

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