Investors seeking safety in ‘cash cow’ ETFs

30 October 2023
| By Jasmine Siljic |
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Cash exchange-traded funds (ETFs) are attracting high inflows as investors flock towards liquidity and defensive strategies in their investment portfolios.

Released earlier this month, the 2023 Stockspot ETF Report described cash ETFs as one of the largest growing segments of the Australian ETF market.

According to the report, Australian investors have driven more than $1.6 billion of net inflows towards these products over the past year, with cash ETFs collectively managing over $4 billion in funds under management (FUM). 

“Cash ETFs, which invest in interest-bearing instruments like bank and term deposits, or short-term money market instruments, are on the rise,” explained Chris Brycki, Stockspot founder and chief executive.

“We’ve found that investors are choosing these products for their great returns and because they simply don’t have the same hassle and conditions of a high-interest bank account.”

While consumers can receive 4.6 per cent to 4.75 per cent interest from a savings account at a big four bank, thanks to rising interest rates, Brycki said ETFs offer more flexibility by not imposing conditions such as monthly top-ups, card usage or limited withdrawals, which are typically found in high-interest savings accounts.

There are currently just three cash ETFs available to Australian investors, which are:

  • The Betashares Australian High Interest Cash ETF (AAA)
  • The iShares Core Cash ETF (BILL)
  • The iShares Enhanced Cash ETF (ISEC)

The largest of the three, the Betashares Australian High Interest Cash ETF, offers an interest rate of 4.2 per cent per annum, as at 30 September 2023.

“This ETF grew by $165 million last month alone and is the 12th Australian ETF to reach $3 billion in assets under management (AUM),” Brycki told Money Management.

Moreover, the product is amongst the top five ETFs by AUM growth, achieving a 54.9 per cent year-on-year asset growth, or $1.2 billion. According to Betashares, it was also the top fund by net flows in H1 2023 with more than $500 million of inflows.

Brycki added: “In our 10 years of researching the more than 250 ETFs on the ASX and Cboe Australia, this is the first time cash ETFs have received so much interest from investors and they are proving to be cash cows.”

Underpinned by inflation

Evidently, attractive interest rate returns have been the driving force behind investors piling into this sector of the ETF market.

The Reserve Bank of Australia (RBA) has been hiking the cash rate at its fastest pace since the late 1980s, according to Stockspot, with 12 rate rises between April 2022 to now.

On 3 October, the cash rate was held steady at 4.1 per cent, marking the RBA’s fourth consecutive hold and Michele Bullock’s inaugural rate call as RBA governor.

She flagged further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time frame, while others predicted no rate cut until late 2024.

The report outlined: “While cash ETFs have been able to keep increasing the interest rates they pay to investors, some banks have not passed on the full rate increases to their savers.”

Speaking to Money Management, Tamara Stats, iShares ETF and index investments specialist at BlackRock Australasia, observed that cash has historically been viewed as an unattractive investment.

“Cash hasn’t returned very well when interest rates were at low levels. That environment has clearly changed as the macro regime has changed.

“What is also incredibly important to investors is liquidity. The amazing thing about ETFs as a vehicle and as a type of fund is that it gives you those liquidity benefits. It’s a feature of ETFs that can’t be understated,” she commented.

BlackRock’s iShares Core Cash ETF utilises a passive investment strategy by tracking the S&P/ASX Bank Bill Index’s performance. The liquid product only holds investments which can be sold on a same day basis, providing a regular flow of income within a diversified portfolio.

Kathleen Gallagher, head of State Street Global Advisors SPDR in Australia and head of ETF model portfolios in Asia Pacific and EMEA, also said ETFs are a reflection of the market’s broader themes.

“If advisers are looking to position their portfolios in a more defensive way and take some of that risk out, you’re going to see safer assets attract more flows. 

“From an asset class level, it’s definitely cash, fixed income and Australian equities that have been attracting flows this year,” she explained.

Don’t hide in cash

Despite the surge towards cash ETFs, insights from J.P. Morgan Asset Management (JPMAM) show that they are still likely to underperform equities and fixed income in the year ahead.

Kerry Craig, JPMAM global market strategist, observed “a bit of a reality check” came through for many investors in the last quarter.

“I think the risk here for us is many investors have been sitting in cash for the last 12 months or longer, enjoying term deposits, and we’re very much aware that we’re pretty much at the end of the rate hiking cycle in many parts of the world, and rate cuts coming through will be a very different dynamic,” he said. 

“It’s not the time to be in cash, that’s how we phrase it. We do think investors will get better returns from equities or more probably fixed income in the year ahead.” 

Recent data released by Vanguard and the ASX described a “resurgence” of Australian equity ETFs in Q3, the strongest quarter for the category this year, which attracted $1.9 billion in cash flows, an increase of 105 per cent from Q2.

“Interestingly, despite the pickup in equity flows, fixed income flows did not drop in Q3 – an encouraging sign that investors are also diversifying their portfolios and finding merit in a balanced asset allocation that includes both shares and bonds, and not simply fleeing to cash (the value of which erodes with inflation),” described Adam DeSanctis, Vanguard’s head of ETF capital markets for Asia Pacific.

Meanwhile, bond ETFs have been on the rise in popularity, which Stats highlighted as a global driving force.

“[Bond ETFs] have just ticked over $2 trillion in assets under management now. We actually think that growth will continue to $5 trillion by 2030. So there’s a huge runway, both globally and domestically, for bond ETFs,” she said.

Gallagher echoed this sentiment, adding that fixed income will continue to gather flows as ETF issuers launch additional products in the space.

“Currently, fixed income only accounts for 12 per cent of the AUM in ETFs, but this year to date it’s actually capturing 50 per cent of flows,” she noted.

Looking ahead, the ETF specialists expressed strong optimism for the broader ETF landscape over the coming years. 

Brycki said: “ETFs have been one of the best tools for building wealth for Australian investors and are continuing to gain broad adoption. The ETF market has quintupled in size over the last five years, growing at a rate of 38 per cent per year.”

According to Gallagher, the ETF industry hit an AUM milestone of $150 billion in July this year and is one of the fastest growing markets across the globe. 

“Despite market uncertainty with concerns about potential recession and persistent inflation, we are seeing flows into ETFs continue which is a big positive,” she said.

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