Investors pour into cash ETFs in search of higher returns

More than $1 billion was put into cash exchange-traded funds (ETFs) that are listed on the Australian Securities Exchange by investors during the second half of 2022 as repeated interest rate rises made the investment class increasingly attractive.

That contrasts with outflows during the first half of last year of almost $900 million, analysis of sharemarket data by BetaShares shows.

Banks are finally paying higher interest on some of their saver accounts, but cash exchange-traded funds are proving a popular alternative.Credit:iStock

During December 2022 and January 2023, about $470 million flowed into cash ETFs. The massive turnaround is partly the result of ETFs passing through the increases in the 0.1 per cent cash rate that started in May last year.

The banks, by contrast, despite handing on the rate rises to their variable rate home loan customers, have passed on little of the increases to savers.

ETFs are listed on the Australian Securities Exchange with their units bought and sold just like shares in listed companies.

Investors in cash ETFs can earn almost 3.5 per cent a year, after management costs, without conditions and where the money can be withdrawn almost immediately.

They invest in a spread of at-call bank deposits and longer-term Australian cash deposits and pay monthly distributions, which is akin to interest.

There are three Australian ETFs available for investors to gain exposure to cash – BetaShares Australian High-Interest Cash ETF, iShares Core Cash ETF and iShares Enhanced Cash ETF.

While cash ETFs have been passing through the cumulative 3.25 percentage points worth of increases since the Reserve Bank of Australia started increasing the cash rate in May last year, banks are only now just catching up.

For example, the Commonwealth Bank lifted the interest rate on its GoalSaver bonus saver account by 0.75 percentage points, to 4 per cent, for new and existing customers.

Westpac will lift the rate on its Life bonus account to 4 per cent – a 0.25 percentage point increase – for new and existing customers. ANZ and NAB have announced similar increases.

The maximum rate on these types of accounts is paid when certain conditions are met, otherwise a much lower base rate is paid.

Some others pay the maximum rate only for the “honeymoon” period – typically between three and six months – after which the rate reverts to the lower base rate.

For example, Westpac eSaver’s total variable rate will increase by 0.25 percentage points to 4 per cent for new customers for the first five months, after which time the rate reverts to the lower base rate. Savers can earn up to about 4 per cent a year with banks, provided the saver is prepared to have their money locked away in a term deposit.

However, there are costs when investing in ETFs that savers must consider. As well as paying a management fee to the ETF provider, investors in ETFs pay share brokerage each time they buy or sell ETF units.

A further important factor to be considered by anyone thinking of putting their money into a cash ETF is that, unlike bank deposits and deposits at other authorised deposit-taking institutions such as credit unions, investors’ cash with ETFs is not protected by the federal government’s deposit guarantee.

ETFs are, however, registered managed investment schemes and the money in them does not form part of the ETF providers’ balance sheet. That means the money is not available to creditors of the ETF provider in the unlikely event of their insolvency.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

The Money with Jess newsletter helps you budget, earn, invest and enjoy your money. Sign up to get it every Sunday.

Most Viewed in Money

From our partners

Source: Read Full Article