Where would you recommend keeping an emergency fund in one's financial portfolio? ....
To me, money is money.
If I had an emergency, I would simply sell some stock mutual fund shares in my taxable account and have the money available the next day. I do this a few times a year anyways.
Folks will gag and say, "But, but, but what if stocks have gone down 50%!!" And my answer would be, "So what? Who cares?"
The reason is that even if I didn't call this stock mutual fund "My emergency fund", then stocks would have gone down 50% anyways and this fund would be down 50% anyways as well. All my stock funds would be down 50%, but I don't own only 100% stock funds. I have some bond funds as well.
So if in an emergency I had to sell the shares of the stock mutual fund in my taxable account (that is, my non-IRA, non-401(k), non-Roth accounts), I would just exchange from a bond fund to a similar stock mutual fund in my tax-advantaged account. The bond funds I use are VCSH (short-term corporate bond YTD 5.2% return), BIV (intermediate-term bond), FSITX (total bond index). After this exchange, I would end up with the same amount of money in stock funds that I had before selling shares in the taxable account to pay for the emergency.
Folks will gag and say, "But,but what if bonds have gone down 10%!!" And my answer would be, "So what? Who cares?" My bond funds are more than 30% of my total portfolio which is about 7 or 8 years of living expenses.
So the idea that an emergency fund has to be available to pay 1-year's of expenses in cash in one hour is ludricous. I am not sure where and when that myth started.
For folks who can't depart from a cash emergency fund, perhaps they can be weaned by having a multi-tiered emergency fund: checking account, credit cards, I-bonds, short-term bonds, etc.
So to directly answer the question: I recommend using a short-term bond fund in a tax-advantaged account for one's emergency fund. If you fear that the short-term bond fund might have dropped 10% when you have your emergency, then just put 10% more in the short-term bond fund to start with.