Who it suits: This ETF is a low risk cash-based investment portfolio. It would suit investors who want to avoid the risks typically associated with more volatile asset classes such as shares and want to protect their capital as a priority. The NewFunds Traci is the only listed ETF in SA to invest in the money market. It aims to give investors exposure to a portfolio of three-month bank deposits issued by SA’s largest banks. In theory, the ETF’s risk should be lower than that of bonds, stocks and commodities. This feature coupled with the fact that it can be traded on the JSE makes it appealing for conservative investors seeking low-cost and liquid alternatives to traditional cash-based investments such as fixed deposits. This ETF would work well as the cash tranche within a multi-asset portfolio.
What it does: The Traci fund tracks the total return version of the Barclays/Absa Tradable Cash index (Traci 3-month). The index is constructed to track the overnight, three-month SA money market deposit rate. The TRACI index measures the mark-to-market value (quoted price in an active market) of the income earned from rolling a 3-month money market deposit on a monthly basis. Interest received is reinvested into the fund so as to increase the net asset value of each unit.
Advantages: The ETF is a good option for retail investors who might not have the R1m normally required to invest in negotiable certificates of deposit. Negotiable CDs usually offer higher yields than traditional call deposits or savings accounts. Additionally, the fund’s diversified portfolio reduces the credit risk that unit holders are exposed to. Absa acts as a market maker, making it easy for unit holders to buy or sell the ETF.
Top holdings: NewFunds Traci invests in high quality negotiable CDs issued by the country’s top banks. About three quarters of the fund is currently invested in Barclays, Nedbank and Investec issued negotiable CDs. The balance is in cash, and negotiable CDs issued by FirstRand and Standard Bank.
Risks: Due to the fact that an investment in negotiable certificate of deposit must be in multiples of R1m, The ETF will, from time to time have residual cash. Such residual cash will be invested in lower return call deposit account reducing the fund’s ability to closely track its benchmark. While default on NCDs is very rare, they still have credit risk.
Fees: NewFunds Traci charges about 20c/year for every R100 invested in the fund making it the cheapest fund on the market with a 0.2% total expense ratio.
The Fund has performed well over the past three years outperforming some bonds and stocks ETFs.
Performance of money market products is influenced by the usual factors that affect bonds: the credit rating of the issuer, the term of the instrument, and market interest rates. These are also influenced by monetary and fiscal policy. Like bonds, the price of negotiable CDs varies inversely with market interest rates: when market interest rates decline, negotiable CDs prices increase, and vice versa. We are currently in an upward interest rate cycle, which implies that the capital value of the fund should decline. However the three month deposits that underpin the fund are rolled over and adjusted to prevailing interest rates, so the interest rate risk is small. This ETF will deliver a low risk and reliable return.
There are currently no listed alternatives to NewFunds Traci but investors can obtain exposure to money market instruments through unit trusts. However, most existing money market unit trusts are benchmarked against a non-investable benchmark, can’t traded on the JSE, and involve higher fees.
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