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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Notes:
[1] Source: APRA, total residents’ deposits on Australian books of ADIs, as of 31 December 2023.
[2] Source: Bloomberg Finance L.P., based on reported balance sheet data for (CBA, WBC, ANZ and NAB), from 2019 to 2023.
[3] Source: ACCC, “Bank customers missing out on earning more interest from savings”, 15 December 2023.
[4] Source: Bloomberg Finance L.P., bond yield expectations, RBA cash target, 3-month, 2-year and 10-year, actual as well as consensus forecasts for 31 December 2024, as of 26 February 2024.

Important Disclosure: Issued by State Street Global Advisors, Australia Services Limited (AFSL Number 274900, ABN 16 108 671 441). You should seek professional advice and consider the product disclosure statement and target market determination, available at www.ssga.com/au, before deciding whether to acquire or continue to hold units in an ETF.  This material is general information only and does not take into account your individual objectives, financial situation or needs and you should consider whether it is appropriate for you. This material should not be considered a solicitation to buy or sell a security. Investing involves risk including the risk of loss of principal. Diversification does not ensure a profit or guarantee against loss. Frequent trading of ETFs could significantly increase commissions and other costs such that they may offset any savings from low fees or costs. 6442725.1.1.ANZ.RTL  Expiry Date: 28/02/2025

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Kathleen Gallagher has been appointed as head of SPDR ETFs Australia, in addition to her current role as head of ETF Model Portfolios Asia Pacific and EMEA, Marie Tsang has joined as a SPDR fixed income strategist for Asia Pacific, Jean Gan has joined as a SPDR fixed income sales specialist for Singapore, Hong Kong and Australia, and Robin Tsui has expanded his role to Asia Pacific gold strategist and gold sales specialist for Hong Kong.

Gallagher began her expanded role earlier this month in Sydney, while the roles of Tsang, Gan and Tsui are effective today and are based in Sydney, Singapore and Hong Kong respectively. All four report to Meaghan Victor, head of SPDR ETFs Asia Pacific Distribution at State Street Global Advisors, who is based in Sydney.

“Our SPDR ETFs business in Asia Pacific is one of State Street Global Advisors’ priorities and we are delighted to continue to invest in more top talent and resources and demonstrate our commitment to the region,” said Victor. “Kathleen and Robin’s expanded roles, alongside the two newly created roles of SPDR fixed income strategist and SPDR fixed income sales specialist, reflect our commitment to meeting the increasing demand from our clients and strengthening our capabilities in the fixed income market in the region.”

Relocating from the UK to Sydney, Gallagher was most recently the head of ETF Model Portfolios EMEA and Asia Pacific at SPDR ETFs of State Street Global Advisors. In her expanded role, Gallagher will lead, manage and develop the SPDR ETFs business in Australia as well as the ETF Model Portfolio business in Asia Pacific and EMEA across all channels, including asset owners, asset managers and financial intermediaries.

“The Australian ETF market has grown five-fold in the last five years to hit AUD 122.78 billion^[1], with even conservative estimates putting it on track to double again by 2024^[2], added Gallagher. “We are committed to strengthening our relationships with clients and continuing to grow our SPDR ETFs business in Australia, and indeed the entire Asia Pacific, and leveraging our local knowhow and global capabilities to provide investors with a comprehensive suite of investment solutions that meet their evolving needs.”

The two fixed income appointments are both newly created roles. Tsang joins State Street Global Advisors from BlackRock, where she was most recently the senior investment strategist for BlackRock Portfolio Analysis and Solutions. In her new role, Tsang will be responsible for State Street Global Advisors’ fixed income ETFs advising Asia Pacific clients how to best position and employ them in investor portfolios, promoting the strategic growth of SPDR’s fixed income products by working together with the SPDR distribution team.

Gan joins State Street Global Advisors from MUFG Securities, where she was most recently the director for institutional investor sales. Prior to that, Gan held various fixed income, derivatives and structured products sales roles at JPMorgan, Societe Generale, Citibank and UBS. Taking on the new role, Gan will be responsible for developing strategies to drive sales of the global fixed income SPDR ETFs, focusing on institutional asset owners and managers in Singapore, Hong Kong and Australia.

“The addition of these fixed income roles will champion the strategic growth of SPDR’s fixed income products and strategies in the region,” said Victor. “With declining US Treasury yields, the yield pickup of Asian bonds has become very attractive to investors. With their extensive experience and knowledge in the industry, Kathleen, Marie, Jean and Robin are uniquely positioned to build on the continued success of the SPDR ETFs business in the region, and to achieve SPDR fixed income net new assets and revenue growth in Asia Pacific in particular.”

Before taking the expanded role, Tsui was Asia Pacific gold strategist. Prior to joining State Street Global Advisors in 2016, Tsui was investment product and research manager at the World Gold Council. In his new role, Tsui will lead the sales strategies for SPDR Gold ETFs in Hong Kong, in addition to his gold strategist role which focuses on gold investment strategy and research.

Over the past 40 years, State Street Global Advisors has built a universe of active and index strategies across asset classes to help our clients, and those who rely on them, achieve their investment goals through a rigorous, research-driven investment process spanning both indexing and active disciplines. State Street Global Advisors is the creator of the world’s first ETFs^[3] and an indexing pioneer. In Asia Pacific, State Street Global Advisors manages ETFs listed in Australia, Hong Kong, Singapore and Japan.

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[1] ASX Investment Products monthly update, August 2021.
[2] Source: ASX, State Street Global Advisors as of 30 June 2021. The forecast growth is an estimate based on a CAGR of Australian ETP growth maintaining 25%p.a. over the period forecast. This information is included for illustrative purposes only. There is no guarantee that the estimates will be achieved.
[3] ETFs managed by State Street Global Advisors have the oldest inception dates within the US, Hong Kong, Australia, and Singapore. State Street Global Advisors launched the first ETF in the US on January 22, 1993; launched the first ETF in Hong Kong on November 11, 1999; launched the first ETF in Australia on August 24, 2001; and launched the first ETF in Singapore on April 11, 2002.

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