Can cash ETFs give clients bang for their buck? BetaShares’ Alex Vynokur shares his view.
With interest rates at record lows, investors and their advisers are increasingly seeking out higher-yield alternatives to ‘at call’ cash.
From a portfolio construction point of view, however, an allocation to cash remains a necessity.
With continued innovation in the Exchange Traded Fund (ETF) market, it is now possible to make allocations to cash at higher interest rates than those available from alternative ‘at call’ options, without incurring duration risk.
Cash ETFs provide a simple and transparent solution for investors looking for a combination of market-leading rates and accessibility, and can be bought and sold like any share on the ASX.
The Cash ETF currently available on the ASX aims to generate a return that exceeds the RBA cash rate, with income distributions paid monthly.
The ETF only holds Australian dollars in bank deposit accounts with Australian banks (currently the ETF has its deposit accounts with four institutions).
However, because it trades like any share on the ASX, holdings in the ETF can be bought or sold at any time during market open without the need for bank account opening or paperwork.
Cash ETFs have gained popularity amongst advisers over the past couple of years as a more efficient means to allocate core cash holdings in client portfolios.
Perhaps the primary reason for this is that many of the at-call account options included on platforms commonly used by advisers only provide the RBA rates on cash balances.
Indeed, as at 31 December 2013, the average interest rate on the default cash options available on the three largest platforms was 2.45 per cent per annum (the RBA cash rate is currently 2.50 per annum), whereas at the time of writing, the rate on the cash ETFs’ cash deposits (after fees) was 3.45 per cent per annum.
A cash ETF can therefore potentially boost returns on client cash holdings by as much as 1 per cent above default alternatives, with availability on a number of the major platforms.
Other than a core allocation, a cash ETF can also be used to implement other key investment strategies for clients. For those at or nearing retirement, cash ETFs can help to generate income with a high level of capital security.
If a client is between investment decisions, cash ETFs can be used to ‘park’ funds whilst a new investment plan is made, but still produce competitive returns.
Of course, there are other cash options available that also achieve some of these aims.
For example, most banks provide an at-call savings account linked to a client’s everyday account, which enables easy access to funds as well as generating a return on the client’s cash holding.
The downside of these accounts is that they will often have an introductory interest rate that then falls back to RBA-level rates over time.
Term deposits are another alternative to at-call accounts that often provide investors with interest income above the cash rate, as long as the investor is willing to lock their funds into the account for a set period.
In a falling interest rate environment term deposits can be a good option for clients’ cash holdings, as they allow a guaranteed return over the pre-determined time period.
However, they also incur potential break fees or forfeiting of interest if the money is accessed before the maturity date.
According to analysis we recently conducted as at December 2013, the current average one-year term deposit rate from the big four banks was 3.3 per cent per annum and the average high interest savings account ‘base rate’ from those banks (once the honeymoon rate elapsed) was 2.5 per cent per annum.
The gap between the two rates demonstrates the previously mentioned trade-off – between higher returns and accessibility of funds – between these two main forms of cash holdings.
A cash ETF provides investors with an efficient third option for cash exposures. Where cash ETFs differ from an at-call account is the opportunity to provide higher returns, while still providing access and liquidity to funds when compared with a term deposit.
A cash ETF can be bought and sold on the Australian Securities Exchange like any share, with settlement taking place on T+3.
Investors should be aware that customary brokerage will be payable on transactions.
Thus, if you are looking for a cash solution for your clients providing higher yields than those currently obtained by the average at-call bank savings account, combined with the flexibility of accessing the funds as easily as selling any share on the ASX, a cash ETF may well be the right fit for your client’s portfolio.
Alex Vynokur is the managing director of BetaShares.
