Making your cash work hard too

Prudent investors keep a percentage of their portfolio in cash, for either a rainy day or to take advantage of investment opportunities.

At-call bank accounts, term deposits, and cash management accounts as part of a trading platform/broker offering are the most common ways investors allocate to cash.

By allocating to only these cash instruments, investors may be limiting how hard their cash can work for them. There are many other cash-like instruments that investors can access that can help them yield more or have their cash work harder. Often, these instruments are only available to institutional investors because they require large capital outlays, sometimes more than $1 million, and trade over the counter.

This is where ETFs are helping investors access these instruments. Collectively, these cash-like instruments are known as money market securities. And these cash and cash-like ETFs have been available on other exchanges for many years.

Cash and cash-like securities are highly liquid and associated with lower risk, though higher risk than a term deposit or cash at a bank. Examples of these cash-like instruments include Australian Government Treasury Notes, Negotiable Certificates of Deposits (NCDs) and Commercial paper.

We explained what these are in our recent Vector Insights, Cash is king.

The recent lure of money market ETFs in overseas markets has been explained by their relatively higher yields in low-interest-rate and uncertain macroeconomic environments.

Before investors consider allocating part of their cash portfolio to an ETF that invests in money market securities, it is worthwhile to consider their advantages and disadvantages, and how to evaluate a cash and cash-like ETF.

The biggest potential advantages and the disadvantages of a cash and cash-like ETFs

First, let’s start with the advantages. The appeal of an ETF that invests in money market instruments is its combination of cash-like liquidity and stability with the potential to generate an enhanced yield. These cash and cash-like funds may complement bank deposit accounts, which are stable and liquid (unless it’s a term deposit), but may not pay a competitive return.

The other advantage you have is that the ETF is professionally managed. It would be difficult for the everyday investor to analyse the entire market of cash and cash-like securities and then allocate to achieve the best outcome. This is an advantage of such a fund, but this leads to its disadvantage.

A disadvantage of an ETF is the management fee it charges. The fee is disclosed in the PDS and on the website, but you should know what you are paying. In something like a cash and cash-like ETF, basis points make a difference, as fees erode returns. ETFs are not protected by any government guarantee, unlike some other cash or term deposits at an authorised deposit-taking institution (ADI). Additionally, ETFs may have different risks to other types of investments; these are outlined in the ETF’s PDS.

How to evaluate a money market fund. What is the right fund for you?

There are many things to consider about an ETF, particularly one promoting itself as a cash or cash-like fund.

1. The fee – as noted above, a lower fee means less of the fund’s return is being eroded by fees.
2. Many funds will include the average rating of their holdings; for a cash fund, this should be investment grade (at a minimum).
3. The history and commitment of the asset manager to ETFs are also important considerations when evaluating funds. You need to ensure that the manager is committed to ETFs and the business of investing.

Last week, VanEck launched its Active Cash Plus ETF (MONY) on ASX. MONY’s management fee is 0.15%*, making it the most cost-effective active cash ETF on ASX. It is professionally managed to maximise the risk-adjusted return across different instruments, issuers and individual securities.

MONY is a portfolio of high-quality, highly liquid Australian dollar cash and short-term money market and short-duration credit securities issued by investment-grade entities. It will aim to pay income monthly.

We think MONY is a way to make your cash work harder… for you.

Key Risks: An investment in MONY carries risks associated with: interest rate movements, issuer default, credit ratings, subordinated debt, bond markets generally, securitisation market, issuer concentration, fund operations and liquidity. Your investment in the Fund is not protected by any government guarantee. See the PDS and TMD for more details.

MONY is likely to be appropriate for a consumer who is seeking capital preservation and a regular income distribution, is intending to use the product as a standalone solution, major, core, minor or satellite allocation within a portfolio, has no investment timeframe and has a low risk/return profile.

* Other costs may apply. Please refer to the PDS.