With interest rates rising from near zero, many investors are again investing in cash and high interest savings accounts.
However, you don’t need a bank account to also be getting great cash returns. Savvy investors are turning to cash exchange traded funds (ETFs) to get a better return on their savings and beating the returns offered by a typical bank account.
What is a cash ETF?
Cash ETFs are securities traded on the ASX that provide exposure to Australian cash deposits. The ETF invests in cash products and deposit accounts that are offered by reputable banks. Distributions (i.e. interest payments) are typically paid monthly.
Cash ETFs allow investors to access a competitive interest rate compared to a typical bank savings account. ETF issuers can negotiate a higher interest with the banks than individuals may be able to achieve themselves.
The benefits of a cash ETF
Cash ETFs can pay more than regular savings accounts. Interest rate hikes are also passed on much quicker to cash ETF investors as opposed to a regular bank account.
Owning a cash ETF removes any need to open or maintain a bank account. It can be done via a normal ASX trading account. There is no need to maintain minimum top ups, purchase conditions, or have your money locked up in a term deposit. The great thing about the cash ETF structure is that it is fully tradable on the ASX. This means there are no penalties for buying/selling the securities, other than paying regular brokerage costs.
Which is the best cash ETF in Australia?
Stockspot reviews and compares more than 250 ETFs in our annual Stockspot ETF Report. In this article, we road test the best cash ETFs in Australia across a range of different metrics to provide our analysis on the most suitable choice for investors.
There are three Australian ETFs available for investors to gain exposure to high interest cash:
- BetaShares Australian High Interest Cash ETF (ASX: AAA)
- iShares Core Cash ETF (ASX: BILL)
- iShares Enhanced Cash ETF (ASX: ISEC)
We compare these cash ETFs across 6 factors:
- Costs and slippage
- Performance and track record
- Interest rate and yield
- Exposure and holdings
AAA is by far the largest cash ETF available, managing around $3 billion for investors. AAA has had the first mover advantage, having listed in March 2012. BILL and ISEC were listed in June 2017 and currently manage $611 million and $318 million respectively.
Costs and slippage
BILL has the lowest costs with an annual fee of 0.07%. ISEC is more expensive, charging 0.12% per year. AAA is the most expensive cash ETF in the market charging 0.18% per year. BILL has the tightest spreads (i.e. lowest slippage), while AAA has large transactional volume and superior liquidity.
|TICKER CODE||MANAGEMENT FEE||BUY/SELL SPREADS (SLIPPAGE)|
AAA is the most liquid cash ETF, trading around $35 million daily, and is one of the most liquid ETF in the entire Australian ETF market. BILL and ISEC have limited relative liquidity. They trade daily around $5.9 million and $5.3 million respectively.
Performance and track record
AAA has been the best-performing cash ETF over the short and long-term. It has returned 2.21% over the last year and 1.31% p.a. over the last five years. It has always beaten its benchmark target, the 30 Day Bank Bill Swap Rate (BBSW), after fees and expenses.
BILL and ISEC have not performed as well due to their underlying holdings and investment strategy (holding more near-term and liquid cash instruments than AAA), returning 1.09% p.a. and 1.23% p.a. over the last five years respectively.
|ASX CODE||1-YEAR TOTAL RETURN||3-YEAR TOTAL RETURN (P.A.)||5-YEAR TOTAL RETURN (P.A.)||ETF inception date||Index/Benchmark strategy|
|AAA||2.21%||1.02%||1.31%||6 March 2012||Outperform the 30 Day Bank Bill Swap Rate (BBSW)|
|BILL||2.09%||0.74%||1.09%||2 June 2017||Track the S&P/ASX Bank Bill Index|
|ISEC||2.13%||0.89%||1.23%||2 June 2017||Outperform the S&P/ASX Bank Bill Index|
Other cash ETFs have launched and subsequently closed down as they struggled to gain much traction compared to the likes of AAA, BILL and ISEC. This included the UBS IQ Cash ETF (MONY), the Pinnacle aShares Dynamic Cash Fund (Managed Fund) (Z3RO) and eInvest Cash Booster Fund (managed fund) (ECAS).
Interest rate and yield
All cash ETFs listed on the ASX pay distributions on a monthly basis. AAA has the highest interest rate (given it invests in higher interest-bearing instruments like term deposits) with a current rate of 3.9% per year. BILL is paying slightly less interest at 3.4%, while ISEC is paying a higher yield of 3.6%.
|ASX CODE||Interest rate per year*||Distribution frequency|
The interest paid on cash ETFs is typically better than the Reserve Bank of Australia (RBA) cash rate of 3.85%. Keep in mind that the interest rate on cash ETFs changes when the RBA announces interest rate changes.
Exposure and holdings
Despite all ETFs being grouped as a cash ETF, their underlying strategies and holdings may differ.
AAA invests in three primary cash instruments:
- At-call bank deposits – these do not have maturity dates and can be accessed any time.
- Notice deposits – these have maturity lock-up periods of between 31-90 days.
- Term deposits – these have a maturity of up to 90 days.
BetaShares picks from a panel of APRA-regulated banks such as NAB, Bendigo, BOQ, JP Morgan, RaboBank, and Citibank. BetaShares then negotiates with these banks on getting a better rate given its size and bargaining power.
AAA invests in cash securities with lock-up periods, meaning it can provide better interest rates. Importantly, AAA can hold no more than 30% of the portfolio in cash deposits with greater than 31 days maturity.
BILL invests in three primary cash instruments:
- At-call bank deposits.
- Negotiable certificates of deposit (NCD) – typically purchased by institutional investors where you need a minimum of $100,000.
- Commonwealth/state government securities – e.g. commercial paper and treasury notes.
BILL differs from AAA in that it only holds instruments that can be sold on the same day. BILL does not invest in term deposits and uses a whole panel of banks including RBC, Suncorp, ING and Westpac.
ISEC is slightly different to AAA and BILL as it looks to get a higher interest rate by investing in more than just cash instruments. For example, ISEC invests in higher yielding securities like floating rate notes and commercial paper. These instruments may have longer maturities and lower credit quality than traditional high-grade government bonds or cash, which increases the volatility of the product. ISEC can hold up to 20% in non-cash items such as floating rate notes.
Note: all these cash ETFs do not enjoy the Australian Government’s safeguard guarantee on retail bank deposits up to AUD 250,000 for ETF investors.
Stockspot’s preferred cash ETF is the BetaShares Australian High Interest Cash ETF (ASX: AAA). It is the largest in size with the longest track record, and has demonstrated good long-term performance. While it may hold less liquid instruments than BILL, its size, superior liquidity and higher interest rate compensates investors for this.
AAA is a great savings investment vehicle to ensure your money is staying ahead of the RBA cash rate, and it has consistently done so since launching in 2012.
AAA is the ETF we use for our Stockspot Savings product which we don’t charge any management fees on.