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From famine to feast in Cash ETFs

ETF Watch - Jun 07, 2017

There was a time not too long ago that cash investors had only a single ETF to pick from. That’s recently changed with a number of new listings, and now investors have a wide range of ETFs available to meet their cash needs. We take a look below.

Betashares Australian High Interest Cash ETF (AAA)

Until recently investors in cash had a single ETF available, the Betashares Australian High Interest Cash ETF (AAA). With no competition, AAA has been one of the Australian ETF success stories, amassing $1.2b in funds under management in around 5 years and is now the 5th largest ETF available on the ASX. AAA’s distribution yield is currently around 2.10%, comfortably outperforming the RBA cash rate of 1.50% and on par with high interest cash accounts and current term deposit rates. AAA is very straight forward in its investment approach, simply investing in bank deposits with the big 4 banks. Management costs for AAA are 0.18% pa and the fund pays monthly distributions.

UBS IQ Cash ETF (MONY)

As one of the biggest Financial Services companies in the world, UBS is a relative minnow in the Australian ETF market and are often not mentioned alongside more specialist providers like iShares, Vanguard, Betashares, Vaneck and ETF Securities. Nevertheless, UBS manage 9 ETFs with a total market capitalisation of around $250m, UBS IQ Cash ETF (MONY) is their latest ETF, launching in May 2017.

MONY has a very similar investment approach to AAA, investing in bank deposits and bank certificates of deposit. A minimum of 50% of assets must be held with the big 4 banks, with up to 50% able to be held in other banks. Management costs are the same as AAA, at 0.18%, and it also pays distributions monthly. MONY has not yet made any distributions, because it is so new, and it will be interesting to see if their exposure to regional and international banks allows it to achieve a higher rate of return than AAA.

iShares Core Cash ETF (BILL)

As the biggest ETF provider in the world, iShares (owned by Blackrock) have been late to the cash ETF product. That has changed today, and with management costs of just 0.07%pa, we expect iShares Core Cash ETF (BILL) to be popular as Australia’s lowest cost cash ETF. Similar to both AAA & MONY, BILL invests in short term bank deposits with the big banks. BILL’s cash deposits include the big 4 banks as well as Australian regional banks and international banks. As per the others, BILL will pay income distributions monthly, but as a brand new offering, there’s no history of distributions to compare against.

iShares Enhanced Cash ETF (ISEC)

If boring old bank deposits don’t float your boat, iShares has an enhanced cash offering hoping to generate a yield slightly higher than their BILL fund. iShares Enhanced Cash ETF (ISEC) has a mandate to invest more of their deposits outside of the big 4 banks, and can also invest up to 20% of the portfolio in floating rate notes, which add a bit more risk, but also greater potential return. Management costs for ISEC are 0.12% pa, with monthly distributions to be paid. We are interested to see how ISEC performs compared to its more boring brother, BILL.

Why invest in cash ETFs?

Some may ask why invest in cash ETFs at all when similar returns can be gained from high interest cash accounts or term deposits at the bank. One of the most compelling reasons we can see is the ability to purchase the ETF through a brokerage account (that you presumably already have), rather than go through all the hassle of of indentification and account setup at a financial institution. SMSF trustees will be aware of the hoops that need to be jumped through to setup an account through their SMSF. However, investors in ETFs need to be mindful of the brokerage that they will incur when buying an selling an ETF, a cost that does not exist with bank deposits. To make the comparison easier, we've created a simple spreadsheet allowing you to compare the return expected from a cash ETF vs a cash account, and how long you must hold the ETF for to exceed the return on the cash account (assuming a higher return is expected). Note tha the calculator below ignores any impact of bid/ask spreads that may apply.

 

The four ETFs discussed today can be compared in the ETF Watch Fund Database by filtering on “Industry” = Cash. We’ll check in after a few months and see what sort of yield each of these new ETFs is providing investors. There has also recently been several new fixed income ETFs launched recently. In our next post we’ll take a look at these.

Let us know your thoughts on cash ETFs in the comments below.

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