Money market ETFs are an alternative to overnight money. Which two types of investors are they suitable for and what investors should pay attention to when making their selection.
Frankfurt. With the increased key interest rates in the euro zone, it is again more lucrative to park money in the short term. In September, the European Central Bank (ECB) raised the deposit rate for savings and loan interest to 2.5 percent. According to market expectations, the key interest rate could rise further in the coming months.
This makes interest investments more attractive for investors. In addition to current account accounts, money market ETFs are also possible. The products are popular with professional investors: At the end of June, a money market-related ETF from the provider Amundi was one of the most widespread passive investments by independent asset managers in Germany. This is shown by an evaluation by the Institute for Asset Creation (IVA) and the data platform Qplix.
According to experts, money market ETFs are particularly suitable for two groups of private investors. Handelsblatt explains what you should pay attention to.
Money market ETFs are stock exchange funds for short-term investments that provide a return close to the ECB deposit rate. They are aimed primarily at investors who want to invest cash reserves in the short term. According to Michael Huber, financial advisor at VZ Vermögenszentrum, the products can be interesting for customers who want to park their money for up to a year. “There are better alternatives for long-term asset positions,” he says.
Commercial banks trade short-term financial instruments on the money market. Passively managed money market ETFs are intended to reflect the interest rates achieved there. To do this, they usually take one of two approaches:
So-called overnight ETFs usually reflect the “European Short-Term Rate” (ESTR), sometimes plus a small premium. The ESTR rate is the interest rate at which European banks lend money to each other overnight. According to the ECB, the ESTR rate rose to 2.44 percent on Wednesday and is therefore just below the current deposit rate. The largest money market ETF on the JustETF platform, a product of the DWS brand Xtrackers (ISIN: LU0290358497), achieved a return of 2.03 percent over the past twelve months. During this period, the ECB deposit rate was two percent for most of the time.
Other money market ETFs replicate the return of Euro government bonds with a maturity of a few months. An Amundi ETF for short-term euro government bonds (ISIN: FR0010754200) achieved a return of 1.94 percent during the period.
This means that the returns that investors can expect from money market ETFs in the coming months are significantly below the promotional interest rates offered by some banks. The digital bank Revolut offers new customers around 4.25 percent on daily money, while its competitor Chase currently offers four percent. However, both offers are limited to four months and a maximum amount. Aside from special offers, overnight interest rates can be well below two percent, depending on the bank.
According to experts, investors with money market ETFs can benefit from the fact that the interest rate automatically adjusts to the market. Jan Tachtler from the asset manager HQ Trust therefore finds the products attractive for investors who have high cash reserves and who are unable to pass on the ECB's deposit interest rate from their bank. “With an investment volume of 50,000 euros, investing in money market ETFs can be worthwhile for a few months,” he says.
According to Tachtler, the products are also used to invest sums that exceed the statutory deposit protection at banks. In the EU, there is generally a level of protection for balances of up to 100,000 euros per customer and bank, which can temporarily increase to 500,000 euros. Money market ETFs are not subject to deposit insurance, but are special funds. The fund assets are therefore not affected if the custodian bank goes bankrupt - regardless of the investment amount.
Financial advisor Huber therefore considers the decision between daily money accounts and money market ETFs to be a question of personal preference. “If you enjoy having multiple money market accounts and regularly switching to the best offer, you can achieve a higher return than with money market ETFs,” he says. “However, this requires effort.” Investors should also ensure that the deposits in the respective accounts are protected by statutory deposit insurance.
Accordingly, Huber sees two groups of investors for whom money market ETFs can be a useful instrument. On the one hand, there are investors who “want to make less effort, but still want to be sure that they will receive an interest rate close to that of the money market”. On the other hand, the products were suitable for investors who wanted to invest more than 100,000 euros.
Nevertheless, according to experts, investors should pay attention to several points. The ESTR rate is usually reproduced synthetically by fund companies by entering into a corresponding exchange transaction with a counterparty. This creates a risk if this counterparty goes bankrupt.
An example of such a synthetic replica is the 24 billion euro ETF from Xtrackers. The stock exchange fund reflects the current ESTR rate plus 0.085 percentage points. To do this, the provider concludes an exchange transaction with Deutsche Bank. It provides the interest rate and provides collateral.
According to the provider, the security portfolio of the Xtrackers ETF currently consists primarily of government and corporate bonds. The collateral is an attempt to minimize the counterparty risk, explains Fabian Heider, product specialist at DWS. The hedging would be adjusted daily to the fund volume. Heider says: "If the counterparty fails, investors are still entitled to their share of the ETF, which counts as a special fund. This consists of a securities basket of collateral."
HQ Trust expert Tachtler therefore recommends taking a close look at the counterparty and the collateral for such synthetic money market ETFs. “If the collateral portfolio consists of stocks, that can pose some risk,” he says. “It also helps if the counterparties are broadly diversified.”
With the other type of money market ETFs, which invest in short-term bonds, investors bear price risk. “In times of stress, when many market participants need liquidity quickly, the risk can become real,” warns Tachtler. In order not to speculate, you should also not purchase money market products in a foreign currency.
Niels Nauhauser from the Baden-Württemberg consumer center points out additional costs compared to overnight investments. These include transaction fees, the difference between the buying and selling price and, if applicable, custody costs. These costs can significantly reduce the additional return, especially for small investment amounts and frequent transactions.
Financial advisor Huber sees it similarly. Unlike money market accounts, money market ETFs can also have a settlement period of one to two days, he says.
Nauhauser therefore considers daily money for the “emergency fund” to be the better choice. “It is simpler, protected by deposit insurance and available daily without exchange trading,” he says. Money market ETFs are still an alternative for investors who want to invest money over several months or longer in a liquid manner and with relatively little fluctuation.
