Money market ETFs as an alternative to overnight money hopping
(More independence from bank strategies)
Thanks to @Epi
@femkelbn
@DonkeyInvestor for drawing attention to this :)
Functionality
Money market investments offer a way to participate directly in the key interest rates set by the central bank.
Money market ETFs are traded normally on the stock exchange and have a price at which they can be bought and sold.
Unlike overnight money, a securities account with a broker is required. There are no risky stocks in the money market ETF, but this depicts deposits that are mapped with the respective interest rate of the money market.
There, banks, companies and governments invest money in the short term and give each other loans with short maturities. These are interest-bearing - and it is with these interest rates that a money market ETF generates its return.
Risk assessment
In their capacity as funds, money market funds also reduce credit risk for their investors. Investors benefit from the diversification of the fund portfolio across different instruments, markets and issuers.
A negligible risk is the lack of deposit insurance. This is present in a time deposit account, but since the ETF is classified as a different asset class, this protection is eliminated. Why negligible? Unlike other investments, the invested money is kept as special assets, so it is protected from issuer insolvency.
The second enormously small risk is the counterparty risk.
As with other ETFs, this risk here is against the respective provider of the swap transactions*****. However, UCITS ETFs may have a maximum swap share of 10% (and these still belong to the special assets and the provider must deposit collateral).
Example return money market ETF
4% key interest rate -> 3.6% €STR/ return p.a.
-2% key interest rate -> -1.6% €STR/ return p.a.
within one year steadily rising interest rates from 0 to 4% = past annual return approx. 1.5%
Yield calculation of modern money market ETFs
short-term (e.g. Euro) interest rate €STR (is always just below the prime rate, shows current money market transactions) ***
- spread calculation on the part of the bank of 0.085%
- 0,1 TER (annual ETF fee)
Utilization thesis
Banks pass on sometimes more and sometimes less interest to the consumer at different times, depending on the strategy and account type. In order not to be dependent on the strategy of the house bank, a money market ETF is suitable as long as the interest rates of the mapped interest rate are higher than the offers of the bank (or on average higher than offers of other banks to which one could switch)
The risk is much lower than that of a capital market investment, the changes are exactly predictable.
Example $XEON
Xtrackers EUR Overnight Rate Swap UCITS ETF 1C
Xtrackers provider, belongs to DWS Group (841 billion under management, in comparison: DEKA (savings bank) manages 372 billion)
EUR overnight rate Index tracks the performance of a deposit bearing interest at the short-term euro rate (€STR)***
Swap Swap Contract *****
UCITS ETF ETF subject to EU UCITS rules
1C accumulating, does not distribute but reinvests
The above mentioned ETF can be purchased via ISIN LU0290358497 at virtually any broker. The annual return tracks the €STR, thus the return for the last year is 2.29% (key interest rates increased from 0 to 4.25%, €STR thus from -0.5% to 3.6%)
If the key interest rates would remain at the current level, the above mentioned $XEON would gain approx. 3.66% p.a..
(ETFs can always be bought and sold when the stock exchange is open, i.e. in Germany alone basically on weekdays from 9 a.m. to 5 p.m.).
Personal Example of action
At my house bank (ING) I get 1% on the overnight deposit account. This is where my nest egg is, because I don't want to depend on a fast money payout from my broker. (Since there is no guarantee how fast the money is transferred back from the clearing account, even if in practice it is usually a few days).
All further savings, which should serve the preservation of assets, I store in the $XEON, (buy the ETF via my broker) until the interest rate of the €STR is below the interest rate of my overnight account (1%). Then I sell the ETF through the broker, so I transfer the total amount back to my house bank.
Although I have alternatively the possibility to always switch to other overnight deposit accounts with always new bank offers, but in order not to burden my SCHUFA negatively I renounce any new openings (+ I am lazy and want to avoid 3 account changes per year).
Thus, instead of having to deal with interest rate offers from all possible banks, I only have to deal with the ECB's key interest rates, which are minimal for me.
These always happen with media attention!
*Money market
On the money market, companies, governments and banks borrow money on a short-term basis. Loans are always granted slightly below the current key interest rate. The central bank uses this rate to control how much it is worthwhile for all parties involved to grant loans, etc. The central bank's interest rate is the key rate.
*** €STR
The €STR is correlated with the key interest rates; it reflects the cost of euro overnight loans from banks located in the euro area.
The €STR is based entirely on daily confidential statistical data on money market transactions collected in accordance with the Money Market Statistical Reporting (MMSR) regulation.
See instantaneous ESTR price in the dashboard here:
**** prime rates
Prime rates are the interest rates at which banks can borrow money from a central or central bank.
High prime rates lead to rising account interest rates (e.g. on savings accounts, overnight deposit accounts, time deposit accounts), low ones to falling account interest rates, as banks want to attract customers by partially passing on these rates.
***** Swap Contract
2 contracting parties enter into a contract that cash flows will be exchanged on specified terms. In this case, short-term bonds.
Swap risks: https://www.fe.training/free-resources/financial-markets/swap-risks/
The whole very understandable as a financial flow video:
https://www.youtube.com/watch?v=Obmjt4USeXQ
Has also been written before from Xtrackers profile:
https://app.getquin.com/activity/VqQlgUhtaB
More info here:
Sources
Internet
Books
"Professionell in ETFs investieren" by Michael Huber, ISBN 9783959726832 Finanzbuch Verlag
@Zukunftsminister
@danielsofficial
@UncertifiedHighPerformer
@Fitzcarraldo
@nulldreinull
@timg1355
@TribleBlack
@Aktienhengst
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