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Are cash ETFs becoming a funding vehicle for equities?

By Jessica Penny
4 minute read

New data suggests that cash ETFs could be becoming a funding vehicle for equities.

Exchange-traded fund (ETF) outflows in February were mainly driven by a lull in using ETFs for cash exposure, with the sale of cash ETFs contributing $97.92 million to total outlflows during the month, according to Betashares.

But it was as recently as January that cash ETFs were in the green, attracting $55.96 million in inflows – coming in fourth behind international equities, Australian equities, and fixed income.

According to Betashares senior investment strategist Cameron Gleeson, a change in risk sentiment among investors is unquestionably behind the departure from cash ETFs.


“The more bullish people are feeling on markets, the more likely they are to be allocated global equities,” Gleeson told InvestorDaily.

Namely, over $1 billion of net inflows or two-thirds of the month’s total flows were in international equity products.

While the asset class has, historically, been a strong performer, Betashares’ case is that this additional surge in activity was funded with monies made from the divestment of cash ETFs.

“Including this is people obviously using a fund like AAA [Australian High Interest Cash ETF], which is a great place to park your cash. You can use that pretty conveniently in the same share trading account as your equities, so you can basically sell one and buy another the same day and you just straight into the market that way,” Gleeson explained.

“It [cash ETFs] will become a funding vehicle for trading equities,” he added.

Gleeson noted that he is not surprised by this emerging trend.

“It’s really driven by the other side, which is what people are wanting to do in terms of equities.”

However, Gleeson suggested that Aussie investors should not rush to jump ship, underscoring that the validity of holding cash in a portfolio is not “in any way undermined” by recent activity.

“Interestingly, the returns you’re getting on cash have improved relative to bonds over the last four months,” he said.

“Clearly there’s value in having that liquidity and it’s still paying a decent yield.

Meanwhile, State Street’s February Risk Appetite Index reading highlighted that dry powder may be beginning to dwindle globally, noting a 0.8 percentage point fall in cash holdings to 19.7 per cent over February.

According to the global firm, cash holdings are now only 1 per cent above their long-run average, marking the smallest overweight in cash holdings in eight months.

State Street Global Markets’ macro strategy lead, Michael Metcalfe, said this indicates that “dry powder is beginning to run out”.

“Even with much higher short-term rates on offer, this demonstrates that institutional investors are happy to move out of cash if the market conditions elsewhere are conducive. And with interest rate uncertainty lingering for the moment, this means equities, where holdings rose sharply once again,” Metcalfe noted.

While Betashares’ July review pointed to increased sales in cash ETFs (-$129 million), the class of funds had, overall, an overwhelmingly successful 2023.

Namely, in the ETF-provider’s end of year report, cash gained two places to occupy fourth position when measured by inflows ($1.04 billion) as investors were enticed by the prospect of higher returns.