Cash exposure in an investment portfolio can come in different guises. A fixed deposit account with a decent interest rate is one way to go about it, but investors who prefer a more flexible option can consider the NewFunds TRACI ETF.
When you invest your money in a fixed deposit account, the bank can use that money to grant overnight loans to other parties. The bank earns interest on these overnight loans that is greater than the annual interest rate they agreed to pay you and the bank keeps the difference. The bank agrees to pay you a higher interest rate on fixed deposit accounts because it can use the money to make more money.
The NewFunds TRACI ETF tracks the performance of Absa’s three-month fixed deposit accounts, with interest earned on these deposits daily. The value of the ETF is calculated based on the current cash value of these deposits plus the interest earned daily.
While a fixed deposit account might be simpler, this ETF has a few benefits. Firstly, money market interest rates are higher than the rates your bank agreed to pay you. Secondly, the ETF doesn’t lock you in for a period of time like your fixed deposit account does. Should you require cash right away, you can simply sell this ETF like any other.
As a diversification vehicle, this ETF remains in the green when markets go down. Furthermore, interest rates tend to go up during times of market turmoil, positively affecting your ETF.
It is worthwhile wondering how the returns on this ETF will be taxed. If you had invested your money in a fixed deposit account or kept it in a cash savings account, you would pay tax on the interest. The interest you earned gets added to your annual earnings and taxed at your marginal rate. In the case of the TRACI, your interest gets reinvested. You still have to declare that income and pay tax on it. However, when you sell your TRACI at a higher price, you have to be careful of capital gains tax. The base cost of your investment goes up by the taxed interest amount. Make sure your tax practitioner knows how to declare this one.
If you’re not sure, a simpler cash product might be a better option. Some new cash products in the market are offering a 10% interest rate on a free account. Not only is your return guaranteed, but you won’t be paying the annual 0.25% TER. The ETF fee won’t bankrupt you, but not having to pay it every year will certainly count in your favour.
Weekly expert: Warren Ingram
Galileo Capital’s Warren Ingram is not convinced that this ETF is a better choice than Absa’s money market unit trust.
“The NewFunds TRACI is an interesting ETF because it aims to track a tradable benchmark for cash investors. While most unit trusts will benchmark themselves against the STeFI Composite Index, it is actually quite a difficult index to invest in.
“Absa launched the TRACI ETF because they believe it is more tradable. I think there is some logic to this decision, however I am not overwhelmed by the returns. I cannot see much difference in objectives or risks between a well-managed money market fund and TRACI and so I am not 100% sure of the investment case.”
|ETF name||NewFunds TRACI 3 Month|
|Issue date||26 January 2012|
|ETF benchmark||Barclays/Absa ZAR Tradable Cash Index 3 Month|
|Tax-free savings account||Investment allowed|
|ETF major holdings||Cash|
|Performance||1 year +7%
3 years +22.8%
5 years +38.1%
|What we like||Cash exposure with better returns and more flexibility than traditional fixed deposit accounts.|
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