Alternatives to Cash
Market Context & Investor Challenges
Many clients today hesitate to invest due to market volatility and keep excess cash on hand. But with interest rates now meaningfully higher than in recent years, holding cash no longer means settling for low returns. In fact, ultra-short Treasury ETFs offer an attractive alternative that combines yield, safety, and flexibility.
What Are Ultra-Short Treasury ETFs?
Ultra-short Treasury ETFs may be a compelling alternative to traditional cash holdings, offering enhanced yields with minimal additional risk. These instruments invest in Treasury securities with maturities typically under one year, maintaining high credit quality while capturing short-term interest rates.
In addition to improved yield relative to traditional bank deposits, ultra-short Treasury ETFs can offer a range of structural and tax advantages. ETFs domiciled outside of the US can provide beneficial structuring by allowing for accumulating classes. Income from an accumulating class ETF is rolled up and considered a capital gain, not income.
Tax Advantages
Tax treatment can materially impact net returns. Consider the following illustrative scenarios based on South African tax legislation for a high net worth individual:
|
Income tax |
Capital Gains Tax |
|
45% |
18% |
|
Scenario 1: Cash in an offshore bank account |
|
Cash in an offshore bank account will earn interest which would be considered income for tax purposes. For earners in the highest tax brackets this interest will be taxed at 45%. In a scenario where a client earns 4% interest at the bank, this results in an after tax before fee return of:
4% x (1-0.45) = 2.2% |
|
Scenario 2: Ultra-short treasury ETFs |
|
Ultra-short treasury ETFs may offer higher yield than cash at the bank but even if returns are on par, there may be tax benefits. When using an accumulating treasury ETF, interest is rolled into the ETF price and treated as capital gains. In this scenario, if a client earned 4%, the after tax before fee return would be:
4% x (1-0.18) = 3.28% |
|
Scenario 3: Ultra-short treasury ETFs with a wrapper |
|
If the client is invested through a wrapper, the capital gains tax rate lowers to 12%, resulting in an after tax, before fee return of
4% x (1-0.12) = 3.52%. |
Flexibility and Portfolio Benefits
Moving funds from a bank deposit into an Ultra-short treasury ETF in a brokerage account also provides greater flexibility. New investments can take time and when your client is looking to time the market, delays can result in missed opportunities. Depending on the administrative burden, the date of trade could be weeks after making the investment decision. However, if funds are already invested in an ultra-short treasury ETF , the decision to invest and the trade could be virtually same day. This capability is particularly valuable in volatile markets where opportunity windows can be short-lived.
From a portfolio management perspective, this aids in consolidating your client’s portfolio. With a more complete picture of your clients’ assets, you are better able to advise on asset allocation, risk management and financial planning from a holistic perspective.
With an ever-changing investment landscape, it is important to remain open to alternative investment strategies that may better suit your client’s needs. With interest rates remaining elevated and market volatility creating hesitation among investors, ultra-short Treasury ETFs present a timely and strategic alternative to traditional cash holdings. Not only do they offer competitive yields with minimal risk, but they also provide notable tax advantages and enhanced portfolio flexibility. By reallocating idle cash into these instruments, advisors can help clients optimize returns, reduce tax drag, and position themselves more nimbly for future opportunities. In today’s environment, there are alternatives — and they may be just what your clients need.
ETF Options to Consider
|
Vanguard U.S. Treasury 0-1 Year Bond UCITS ETF Acc (VDST): |
Vanguard is the 2nd largest ETF provider with USD 3,22 trillion in assets under management. This ETF tracks the Bloomberg Short Treasury Index, which measures the performance of US dollar-denominated bonds paying a fixed rate of interest issued by the US government. Bonds in the Index have maturities of less than one year and include US Treasury bills, notes and bonds with remaining maturities between one month and one year. The ETF was issued in September 2020 and currently has USD 5,55 billion in AUM.
|
|
iShares $ Treasury Bond 0-1yr UCITS ETF (IB01): |
BlackRock is the largest ETF provider with USD 3,36 trillion in assets under management. The ETF seeks to track the investment results of the ICE US Treasury Bond Index composed of US Dollar denominated government bonds issued by the US Treasury, with remaining maturities between zero and one year. The ETF was launched in February 2019 and currently has USD 15,6 billion in AUM.
|
To explore how ultra-short Treasury ETFs can enhance your clients’ portfolios, contact the Magwitch team today.
Magwitch Offshore is a leading provider of Global Balanced ETF portfolios with products in all major currencies. Magwitch utilises an advisor distribution model and their portfolios are available through offshore endowment structures provided by some of the larger Insurers.