(More independence from banking strategies)
Thanks to @Epi
@femkelbn
@DonkeyInvestor for drawing attention to this :)
Functionality
Money market investments offer an opportunity to participate directly in the key interest rates set by the central bank.
Money market ETFs are traded as normal on the stock exchange and have a price at which they can be bought and sold.
Unlike overnight money, a custody account with a broker is required. There are no high-risk shares in the money market ETF; instead, it tracks deposits that are represented by the respective interest rate on the money market.
Banks, companies and governments invest money there in the short term and give each other loans with short maturities. These bear interest - and a money market ETF generates its return with this interest.
Risk assessment
In their capacity as funds, money market funds also reduce the credit risk for their investors. Investors benefit from the diversification of the fund portfolio across different instruments, markets and issuers.
One negligible risk is the lack of deposit protection. This is the case with a fixed-term deposit account, but as the ETF is classified as a different asset class, this protection does not apply. Why negligible? Unlike other investments, the money invested is kept as special assets and is therefore protected against the insolvency of the issuer.
The second extremely low risk is the counterparty risk.
As with other ETFs, this risk is borne by the respective provider of the swap transactions*****. However, UCITS ETFs may have a maximum swap share of 10% (and these are still part of the special assets and the provider must deposit collateral).
Example of money market ETF returns
4% key interest rates -> 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 (always just below key interest rates, shows current money market transactions) ***
- Spread calculation by the bank of 0.085%
- 0.1 TER (annual ETF fee)
Utilization thesis
Banks pass on more or 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 interest rate shown are higher than the bank's offers (or are higher on average than offers from other banks to which one could switch)
The risk is significantly lower than that of a capital market investment and the changes are precisely predictable.
Example $XEON (+0%)
Xtrackers EUR Overnight Rate Swap UCITS ETF 1C
Xtrackers provider, part of the 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 interest rate (€STR)***
Swap Swap contract *****
UCITS ETF ETF subject to the UCITS rules of the EU
1C Accumulating, does not distribute but reinvests
The ETF mentioned above can be purchased via ISIN LU0290358497 from almost any broker. The annual return tracks the €STR, so the return for the last year is 2.29% (key interest rates rose from 0 to 4.25%, €STR thus from -0.5% to 3.6%)
If key interest rates were to remain at their current level, the above-mentioned $XEON would gain approx. 3.66% p.a. in value.
(ETFs can always be bought and sold when the stock exchange is open, i.e. on weekdays from 9 a.m. to 5 p.m. in Germany alone).
Personal Action example
I get 1% on my call money account at my bank (ING). This is my nest egg, as I don't want to be dependent on my broker paying out money quickly. (As there is no guarantee how quickly the money will be transferred back from the clearing account, even if in practice it is usually a few days)
I store all other savings that are intended to preserve assets in the $XEON (buy the ETF via my broker) until the interest rate of the €STR is below the interest rate of my call money account (1%). Then I sell the ETF via the broker, i.e. transfer the total amount back to my house bank.
Alternatively, I always have the option of switching to other call money accounts when new bank offers come up, but I don't open any new accounts so as not to negatively impact my SCHUFA (+ I'm lazy and want to avoid switching accounts 3 times a year).
So 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.
This always happens with media attention!
*Money market
Companies, governments and banks borrow money on the money market in the short term. Loans are always granted slightly below the current prime rate. The central bank uses this to control how worthwhile it is for all parties involved to grant loans etc.
*** €STR
The €STR correlates with key interest rates, it reflects the cost of euro overnight loans from banks based 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 Regulation (MMSR).
See the current ESTR price in the dashboard here:
**** Key rates
Key interest rates are the interest rates at which banks can borrow money from a central or central bank.
High key interest rates lead to rising account interest rates (e.g. on savings accounts, call money accounts, fixed-term deposit accounts), while low key interest rates lead to falling account interest rates, as banks want to attract customers by passing on some of this interest.
***** Swap contract
2 contracting parties conclude a contract to exchange payment flows under certain conditions. In this case, short-term bonds.
Swap risks: https://www.fe.training/free-resources/financial-markets/swap-risks/
The whole thing is very easy to understand as a financial flow video:
https://www.youtube.com/watch?v=Obmjt4USeXQ
Has also been written before from the Xtrackers profile:
https://app.getquin.com/activity/VqQlgUhtaB
More info here:
Sources
Internet
Books
"Investing professionally in ETFs" by Michael Huber, ISBN 9783959726832 Finanzbuch Verlag
@Zukunftsminister
@danielsofficial
@UncertifiedHighPerformer
@Fitzcarraldo
@nulldreinull
@timg1355
@TribleBlack
@Aktienhengst
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