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Advisers avoid cash ETFs but favour ETFs for growth
Lured by the prospect of lower costs than actively managed funds and the ability to build entire portfolios with exchange-traded funds (ETFs), many advisers and investors now favour Australia’s ETF market for access to investments ranging from shares and bonds to physical commodities like gold and copper. However, for cash investments, direct investments are still preferred over ETFs, advisers say.
As interest rates rise, more investors are directing funds directly into cash products such as term deposits and online savings accounts. But many advisers are avoiding cash ETFs, preferring to make direct investments to avoid fees.
“I know that there are a number of cash-based managed funds and ETFs, but we have never bothered exploring that sector of the market,” senior financial adviser Scott Keeley of Wakefield Partners said.
“We either allow clients to manage their cash or use short-term term deposits. This helps us to keep transaction costs down, and explaining bank accounts and term deposits [to investors] is far easier than cash-based ETFs and managed funds,” he said.
Drew Meredith, managing director at financial planning firm Wattle Partners, said more investors are considering cash and fixed-interest investments amid fears of global recession, given these investments offer greater income as interest rates rise. But Meredith, too, is making direct investments rather than using cash ETFs.
“We prefer the control and ability to match term deposit terms to the impending needs for the cash by the client,” says Meredith.
“At present, we don’t use ETFs for cash products. That said, I am aware of the growing popularity of ETFs like BetaShares Australian High Interest Cash ETF and the like, which are predominantly recommended by advisers using platforms. They tend to offer an easy way to hold cash within diversified portfolios for increasingly popular managed accounts or separately managed accounts.”
Felicity Thomas (pictured), senior private wealth adviser at Shaw and Partners, is also making direct investments into cash products for clients. She likes the flexibility of high-interest cash accounts, as well as term deposits.
“We don’t use cash ETFs; we use the Macquarie Accelerator as it pays 3.3 per cent at call, which is great for our clients. We also use Australian Money Market, which gives us access to various term deposits across various banks,” she said.
“Alternatively, if our clients have variable home loans, we recommend they put excess cash in their offset accounts to offset their non-deductible debt interest, as, generally speaking, the interest rate on the home loan is going to be higher than the interest rate you can get in a savings account or term deposit.”
For investors who take a more active approach to wealth building and buy and sell shares directly, many use cash management accounts (CMAs) to hold their funds, according to Shane Langham, senior private wealth adviser with Sequoia Wealth Management. And his clients aren’t generally moving into cash out of shares.
“Most clients are happy to sit on the current portfolios they have in place,” Langham said.
“These portfolios are direct share investments mainly, with a little bit of ETFs. I have trading clients who use exchange-traded options or warrants to leverage up positions looking more at the shorter term. When they are not in the market, their money mainly sits in CMAs until they find the next stock to buy or position to enter.”
ETFs still good for growth
For growth investments, however, ETFs are often the starting point. “ETFs have well and truly taken over from actively managed funds,” Keeley said.
“As constructors of personalised direct investment portfolios, ETFs allow us to cost-effectively provide both core asset sector exposure as well as access to thematics that align with our clients’ interests and philosophies – often for a much lower cost than managed funds,” he added.
Meredith agreed. “We are product-agnostic, meaning when we seek to build portfolios, we look for the most appropriate and efficient exposure to any asset class, be that US equities, Australian equities, or government bonds. In most cases, the starting point is an ETF given the lower cost, ease of implementation and transparency.”
However, HLB Mann Judd wealth management partner Jonathan Philpot noted that some clients are wary of ETFs after a bad year for tech stocks in 2022.
“ETFs don’t have any greater momentum now than over the last few years; if anything, a few of the overseas ETFs have had disappointing 12-month performance figures, such as the US market and technology indices.”
