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3 A-grade ETFs offering cash and yield

Glenn Freeman  |  14 Aug 2017Text size  Decrease  Increase  |  
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Each of these exchange-traded funds offer relatively safe spots to park your money, but you need to take the time to understand the vehicles' underlying assets and other details.


Glancing through yield figures for ETFs--or, indeed, any type of investment product--is no way to decide where to invest your money. "We checked the factsheets and found some quoted 'running yield' while others quoted 'yield to maturity,'" says Alex Prineas, associate director of passive strategies, Morningstar.

He believes there should be little difference anyway, "because the funds are extremely low duration and high credit quality," but urges caution given that most of the funds have "no track record of returns or income available to cross-check".

Morningstar's latest ETF Investor report highlights the six newest cash, short-term, and floating-rate ETFs. All of them hold A-grade credit ratings, ranging from AA-minus through to A-plus. Three of them are briefly explained below--insights on all six are available to Morningstar subscribers.

One of those within the cash ETF category, which are comprised primarily of bank deposits, is BetaShares High Interest Cash (ASX: AAA). This invests in bank deposits with five Australian banks: NAB, Bankwest, Bank of Queensland, Rabobank, and ME Bank. It can also hold term deposits.

As bank interest rates continue to remain low, BetaShares has adjusted its approach slightly, increasing this ETF's exposure to notice accounts. These are savings accounts, such as fixed or term deposits, on which the account holder is required to give notice before making a withdrawal, to avoid incurring financial penalties.

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BetaShares High Interest Cash holds around 64 per cent of its portfolio in notice accounts, with cash making up the remaining 36 per cent.

Given the ETF's significant exposure to the banking sector, "sizeable redemptions may cause spreads to widen and limit investor redemptions within the notice period in a worst-case scenario," says Anshula Venkataraman, Morningstar fund research analyst. "But this would require an atypical series of events, and BetaShares has taken several measures to reduce this possibility."

iShares Enhanced Cash (ASX: ISEC) is a short-term fixed-interest ETF, which invests primarily in Australian dollar deposits and certificates of deposit (CDs), mostly through the big four banks.

Similar to bank or term deposits, CDs can be bought and sold on the secondary market. But unlike a term deposit, investors can retrieve their money early, though they are subject to some interest rate risk.

The underlying assets are Australian government, semi-government and corporate treasury notes and commercial paper, and corporate fixed or floating-rate notes.

VanEck Vectors Australian Floating Rate (ASX: FLOT) is a recently-launched ETF focusing specifically on these notes. Floating-rate notes are bonds that have a variable coupon, equal to a money market reference rate, plus a quoted margin rate.

It invests in Australian bonds issued by corporate entities, including the four largest Australian banks, foreign banks, other lending institutions, and Australian listed property trusts.

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Glenn Freeman is a Morningstar senior editor.

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