Another cash ETF on the scrap heap
And how to avoid picking funds on their deathbed.
Australia's cash ETF sector has dropped from five funds down to three and now just two remain as issuers weigh up the benefits of keeping these products on their books.
Two cash-ETFs shuttered in May and June last year – the UBS IQ Cash ETF and Pinnacle's zero-fee aShares Dynamic Cash ETF. Both had assets of less than $5 million at the time.
Perennial Investment Management announced the closure of the eInvest Cash Booster Fund (ECAS) earlier this month citing a failure to "reach sufficient scale to be economically viable".
"PIM has determined that it is in the best interests of unitholders to revoke the Fund's quotation on Chi-X and wind it up," the responsibility entity said in a filing.
ECAS held assets of $8.9 million and was delisted on 22 July.
All three products were short lived. The eInvest and Pinnacle products were both launched in 2019, while the UBS fund was listed in 2017.
Total net assets, 5-Yr | Cash ETFs
Source: Morningstar
Cash ETFs typically aim to outperform the S&P/ASX Bank Bill Index, after fees and expenses. Larger funds can often negotiate higher interest rates from banks.
"The luring aspect of cash ETFs is convenience, avoiding the administrative burden of continually seeking out the best rate," says Morningstar analyst Chris Tate.
"Still, an enterprising investor will likely have their time rewarded shopping around with a willingness to switch between financial institutions, at least for higher introductory levels."
Two cash products dominate the cash ETF market – BetaShares Aus High Interest Cash ETF (AAA) and iShares Core Cash ETF (BILL). Both hold assets over $500 million. Of these, Morningstar Australia only covers the BetaShares ETF.
Awarding it a Neutral rating, analyst Chris Tate says this ETF offers a "convenient cash investment" but "isn’t faultless". He notes that declining interest rates have shrunk returns to cash even as fees have stayed unchanged.
"This ETF has fulfilled its objective since inception, producing a margin above benchmark cash rates after fees and isn’t compromising on credit quality to generate extra yield," he says. "The 0.18 per cent investment fee has remained for some time, despite declining absolute returns and an increasing asset base."
AAA | Snapshot
Source: Morningstar. Returns are to month-end June 2021
Avoid the terminator
Since March 2020, managers have shut/closed upwards of fifteen ETFs. In a 2018 paper, Morningstar advised investors to avoid products likely to be terminated. Several reasons were listed including difficulty getting money back, potential triggering of capital gains, and the likelihood that small ETFs will typically have higher bid-ask spreads ahead of closure, meaning it costs more to buy and sell them.
How can you spot a potential closure? Size is one of the most important factors to consider:
"We think the number one factor in predicting which funds will close is the fund size," analysts say.
"ETF managers cite reasons such as changing market conditions, margin pressure, and so on. But ultimately, if the funds were large, popular with investors, and profitable for the ETF manager, then they probably wouldn’t be terminated.
"There's no hard and fast rule on what constitutes a reasonable fund size, as it can depend on the asset class, the cost of the underlying index, the ETF operator's scale, and so on. But if you want to avoid termination candidates, it is worthwhile considering the size of the ETF."
Other aspects to consider are whether the products play a core role in a portfolio or are more of a supporting player – aka to make short-term tactical bets – and whether the products are likely to attract a broad range of investors.
"In general, core strategies are less likely to be terminated, while niche strategies appear to be more likely targets."
"Consider features like management costs, bid/ask spreads, portfolio turnover, distribution frequency, and any tax complications, such as whether the vehicle is cross-listed or is a locally domiciled ETF."
ETP closures by year, category
Source: Morningstar
