What is NAV Erosion? A Guide for Treasury Investors

How Does NAV Erosion Work? A Comprehensive Guide for Treasury Investors

Most businesses with more cash than they need for the next few months end up holding some of it in a fund: a money market fund, a bond ETF, or an ultra-short income fund. Every one of these funds reports a net asset value (NAV), and when NAV falls, a cash reserve can shrink even while the yield on your statement looks healthy.

NAV erosion is a concept amateur investors may not be familiar with, but it’s a silent killer that is important to know about. A fund down a few percent in its NAV can wipe out a year of interest income, and the loss becomes permanent if the business has to sell shares to cover a large expense during a downturn. Knowing which funds carry the most exposure, and why, can help your business develop a stronger treasury investment strategy.

When dealing with stable investments for your business, two things are as important as the yield: fees and NAV. Slash Treasury puts idle cash into two institutional-grade funds from BlackRock and Morgan Stanley, both shaped for short-term reserves rather than long-duration bond exposure.⁶ There's no minimum balance, no management fees when you hold $500K or more, every user gets the same yield regardless of plan or balance, and your treasury holdings sit in the same dashboard as your business’s accounts and cards.¹

What is NAV Erosion?

NAV erosion is a sustained decline in a fund's net asset value per share. Net asset value (NAV) is the per-share value of everything a fund owns, minus what it owes. When that figure drifts lower and doesn't recover, each share you hold is worth less than when you bought it, even if the fund kept paying income along the way.

For a business, this matters because many of the products used to hold reserve cash are funds. Money market funds, bond ETFs, and ultra-short income funds all report a NAV, and how stable that NAV is determines whether a product behaves like a cash reserve or like an investment that can lose principal.

The formula is simple: total assets minus total liabilities, divided by shares outstanding. Say a bond fund holds $500 million in securities and $5 million in cash, owes $3 million in accrued expenses and other liabilities, and has 50 million shares outstanding. Its NAV is ($505 million minus $3 million) divided by 50 million, or $10.04 per share.

To measure erosion, compare today's NAV to the NAV when you invested. If that same fund's NAV falls to $9.80 a year later, the share price has declined about 2.4%.

Causes of NAV Erosion

NAV erosion usually doesn’t have one clear source. Many different factors can gnaw at NAV, often simultaneously. Here are some of the most common pressures that can lead to NAV erosion:

Rising interest rates

Bond prices move in the opposite direction of interest rates. When rates rise, newly issued bonds pay more, so existing bonds with lower coupons lose value until their yields match the market. Funds that hold longer-maturity bonds feel this most, because their holdings stay locked into below-market rates for longer. This is the most common cause of NAV erosion in bond funds and the one most relevant to treasury investing.

Credit deterioration and defaults

When an issuer's financial health weakens, the market demands a higher yield to hold its debt, which pushes the bond's price down. A downgrade by a rating agency can trigger the same effect. If an issuer defaults outright, the fund may recover only part of its investment. Funds holding corporate debt, commercial paper, or lower-rated securities carry this risk; funds holding only U.S. Treasuries largely do not.

Distributions that outpace earnings

Some funds pay out more than their holdings earn, often to maintain an attractive headline yield. The difference comes from the fund's principal. Over time, that steady return of capital reduces the asset base, which lowers both NAV and future income. This pattern is common in high-distribution products such as certain covered-call and option-income funds.

Fees and expense drag

A fund's expense ratio is deducted from fund assets on an ongoing basis. In most cases, fees reduce the income a fund passes through rather than its NAV directly. When yields are low or a fund's costs run high relative to what its holdings earn, though, expenses can contribute to a slow decline in value.

Forced selling during heavy redemptions

When many investors withdraw at once, a fund may have to sell holdings quickly, sometimes at depressed prices in a stressed market. Those losses are absorbed by the shareholders who stay. This dynamic played out in March 2020, when institutional prime money market funds saw heavy outflows and regulators stepped in to support short-term funding markets.

Importance of NAV Erosion on Treasury Investments

A treasury reserve's job is to earn a better return on cash the business doesn't need yet by placing the extra cash in stable, relatively liquid investments. However, even if yields look strong, a 3% NAV decline on a $2 million treasury reserve would be a $60,000 loss, which could erase most of a year's yield earnings.

A bond ETF (exchange-traded fund) is a pooled fund that holds a basket of bonds, such as U.S. Treasuries or corporate debt, and trades on a stock exchange like a single share. Businesses use Treasury-focused bond ETFs to earn yield on reserves without buying individual bonds. Because bond ETFs have floating NAVs, their value moves with the bonds they hold.

Three factors determine how much a bond ETF's NAV can erode:

Rate sensitivity: When rates rise, existing bonds lose value, and bonds with longer maturities lose the most. In 2022, three iShares Treasury-only ETFs showed the spread: the long-term TLT returned roughly negative 31%, the 1-3 year SHY about negative 4%, and the 0-1 year SHV about positive 1%.
No maturity date: A Treasury held to maturity repays its full face value, erasing any price drop. A bond ETF never matures, so a rate-driven NAV decline recovers only if rates fall or as higher income builds up, which can take years.
Market price vs. NAV: ETF shares trade at whatever buyers will pay, which can drift from NAV. In March 2020, LQD, a large corporate bond ETF, briefly closed about 5% below NAV, while short-term Treasury ETFs stayed close to theirs.

Slash Treasury invests in a BlackRock government money market fund that holds U.S. Treasury bills and other government-backed assets, and the Morgan Stanley Institutional Ultra-Short Income Portfolio (MULSX), an ultra-short duration bond fund. The ultra-short fund has a floating NAV, but its short duration and high credit quality are intended to keep NAV movement low.

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How to Assess Investment Risk for Your Business

Before you move reserves into a fund, check how much its NAV could fall and whether your business could wait out a drop. The five steps below cover what to look for, from sorting your cash by when you’ll need it to reading a fund’s fact sheet.

Step 1: Separate operating cash from long-term reserves

Split cash into money needed within three months, a three- to twelve-month buffer, and reserves you won't touch for a year or more. The sooner you need the money, the less NAV movement you can afford, since there's no time to wait for a recovery.

Step 2: Check whether a fund has a stable or floating NAV

The fund's prospectus or fact sheet will say. Stable-NAV government money market funds carry the least principal risk, while ultra-short bond funds, prime money funds, and bond ETFs all float with the market.

Step 3: Gauge interest rate risk with duration and weighted average maturity

For a floating-NAV fund, multiply duration by a plausible rate increase. A duration of 0.5 suggests about a 0.5% loss if rates rise one percentage point; a duration of 6 suggests about 6%. For money market funds, check weighted average maturity (WAM), which Rule 2a-7 caps at 60 days. A lower WAM generally means a steadier NAV.

Step 4: Compare total return vs. yield to spot NAV erosion

Set the fund's one-, three-, and five-year total return next to its advertised yield. A total return that consistently trails yield usually means the fund is giving back principal. Confirm the yield is quoted net of fees.

Step 5: Review a fund's credit quality and redemption terms

Funds holding only Treasuries and other government debt are less exposed to sudden NAV drops than funds holding corporate debt or commercial paper. Also check how quickly the fund settles withdrawals, its daily cut-off times, and whether it can charge liquidity fees on redemptions.

Treasury Portfolio Management Strategies

A good treasury strategy keeps NAV erosion from turning into an actual loss for your business. Most companies use a mix of the approaches below, depending on how much cash they hold and when they’ll need it.

Separate cash by need: Hold operating cash, near-term reserves, and long-term reserves separately, keeping each bucket's duration shorter than when you'll need the money. Covering payroll then doesn't require selling a fund while its NAV is down.
T-bill laddering: Buy Treasury bills that mature on a staggered schedule, such as every four weeks. Each bill repays its full face value at maturity, so interim price swings don't affect your cash.
Government funds for core reserves: Keep the cash you can least afford to lose in government money market funds, which avoid the credit exposure and liquidity fees of prime funds.
A written investment policy: Set allowed products, maximum duration, minimum credit quality, and per-fund limits so decisions stay consistent as the business grows.
Reserves close to operating accounts: Keeping treasury funds on the same platform as checking shortens the time needed to move cash. With Slash, treasury …

Put Your Idle Cash to Work with Slash

Slash Treasury invests in the kinds of funds this guide points to for your business’s reserves: a BlackRock government money market fund that seeks a stable $1.00 share price, and a Morgan Stanley ultra-short income fund managed for low NAV volatility. Securities are protected by SIPC up to $500,000 (including $250,000 for cash).

Slash is more than a treasury manager; it’s an all-in-one business banking platform. Keeping treasury next to your accounts, cards, and financing gives you one view of your cash and fewer transfers between institutions.⁵ When everything is in one place, you can see a big upcoming bill and initiate a withdrawal to secure an early payment discount, get a better idea of your cash flow, simplify reconciliation when handling accounting at the end of the month, or draw on short-term financing for a cash shortfall instead of redeeming reserves while a fund's NAV is down.

Here’s what else you get with Slash:

Modern business banking: Open unlimited virtual checking accounts from the dashboard, with FDIC insurance up to $200M through Column N.A.'s insured cash sweep network.²
Slash Visa Platinum Card: Corporate charge card that earns up to 2% cash back on eligible spending. Spin up unlimited virtual cards for your team, set granular spend limits per card or team, and get powerful insights into your expenses with real-time tracking and alerts.
Multiple payment methods: Send money via same-day ACH, RTP, FedNow, or international wire to 180+ countries. No domestic transaction fees for outbound payments with Slash Pro.
Accounting integrations: Sync transactions with QuickBooks Online, Xero, Sage Intacct, NetSuite, and more. Automatically categorize your transactions in Slash, attach receipts, and manage your bills to get rid of the accounting busywork.
Payment processing: Use Slash to embed a custom checkout into your site or collect card payments from your customer’s invoices without setting up a separate merchant account (subject to eligibility).
Stablecoin payments: Send and receive USDC and USDT using built-in on/off ramps, with near-instant transfers across 15 different blockchains.⁴

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Frequently Asked Questions

Can a money market fund lose money?

Yes. Money market funds are investments, not deposits, so they aren't FDIC-insured, and fund sponsors have no legal obligation to support a fund that falls below $1.00. Government money market funds have historically carried very low risk of loss, while prime funds with corporate holdings carry more.

Is NAV erosion the same as losing money?

Not necessarily, at least not right away. A lower NAV is an unrealized loss until you sell, and it can recover if rates fall or credit conditions improve. The loss becomes permanent if you redeem shares while NAV is down, which is why matching funds to your cash timeline matters.

Do Treasury bills experience NAV erosion?

An individual Treasury bill held to maturity pays its full face value, so price changes along the way don't affect the final payout. Funds that hold T-bills behave slightly differently because they continuously buy and sell, but their very short maturities keep NAV movement minimal in most cases.

How often is a fund's NAV calculated?

Mutual funds and money market funds typically calculate NAV at the end of each trading day, and some money market funds price several times a day. ETFs also publish a daily NAV, but their shares trade throughout the day at market prices that can sit above or below it.

Should a business invest operating cash in bond funds?

In most cases, no. Operating cash needs to be available on short notice, and a floating-NAV bond fund could be down when a large expense comes due. Bond funds generally make more sense for reserves the business doesn't expect to touch for a year or longer.