Marie Tsang
Now is the time for Australian investors to consider putting their cash back to work.
By the end of 2023, Australia’s 80 plus authorised deposit-taking institutions had collectively attracted about $2.9 trillion in deposits[1].
The big four banks alone have gained $660 billion in deposits since the pandemic[2].
Against a backdrop of increasing rates over the last two years, that made sense because bank cash has certainly generated solid returns at low risk.
The rush to cash also occurred while bond returns were particularly challenged, although last year saw a partial bond recovery.
However, with the Reserve Bank of Australia expected to consider lowering rates this year, we believe investors may now benefit from putting their bank cash back to work. For this purpose, bond exchange-traded funds (ETFs) might be worth considering.
Let’s look at how the two types of investments compare.
Bank cash and at call deposits
High interest at-call cash investments are, as the name suggests, quite readily accessible.
Term deposits typically require significant notice to withdraw funds and may incur penalties for early withdrawal.
In addition to potential inconveniences around timing, deposit customers are generally price-takers since rates of return are the full discretion of banking and other institutions.
It is an area that caught the attention of the ACCC, which undertook an inquiry in 2023 to review retail deposit products and practices3. Additionally, term deposit rates are locked in for a given period, which cushions investors from falling rates but prevents them from benefiting when rates climb.
From a security perspective, cash deposits with authorised deposit-taking institutions may be protected under the Financial Claims Scheme (up to a dollar limit), but investors can find themselves exposed beyond this.
ETF bonds
In contrast to term deposits, ETFs may be transacted any time during a trading day, thereby providing investors with access and flexibility.
Bond exposures trade in a market that is balanced by buyers and sellers, more accurately and quickly reflecting changes in interest rates and other market conditions.
ETFs are also fully backed by a portfolio of underlying assets safeguarded by a custodian, offering more security.
Finally and importantly, over a long enough horizon, a portfolio of bond assets (particularly when used as a complement to growth exposures in a diversified portfolio) will have a better chance of maintaining its value, while a cash investment’s value can erode over the same time period, particularly if inflation is as high as we have witnessed in recent times.
The opportunity in bonds arises as yields have adjusted higher, with a good chance interest rates are lower by the end of the year4. As interest rates fall, bond valuations generally increase, increasing the value of bond ETFs (the reverse is also true).
What are the risks of ETFs?
There is always an element of risk when investing, and you should consider your investment objectives, risk tolerance and investment horizon to ensure your investment choices align.
Analysts may on average predict that bond yields will fall over the course of 2024, but they have predicted cuts before and have been proven wrong.
With the Australian dollar at historical lows, international bond exposures may be at risk of an appreciating AUD, while currency hedging can be costly. For example, hedging USD exposures back to AUD can create a drag on performance.
Nevertheless, this risk may be mitigated by investing in Australian bonds, for which there are plenty of ETF options available.
So there are your options. Is it time you get your cash back to work?
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