Money market ETFs are a popular alternative to overnight money – cheap, transparent and ideal for beginners. However, there are a few points to keep in mind.
• Money market ETFs passively track the ECB’s reference interest rate
• The annual costs are usually between 0.1 and 0.2 percent
• Unlike call money, there is no statutory deposit protection
What are money market ETFs and how do they work?
A money market fund invests in so-called money market instruments – i.e. short-term loans between banks, companies and states. As set out in the EU Money Market Regulation, according to the EU definition, real money market funds may only invest in short-term, highly liquid and high-quality securities, with a maximum term of 397 days.
The main difference between active and passive money market funds lies in the management approach. While a fund manager makes the investment decisions in active funds, money market ETFs passively track an index that reflects the daily development of the Euro Short-Term Rate (€STR). In contrast to actively managed money market funds, money market ETFs can be traded on the stock exchange and can therefore be purchased without an issue fee.
Advantages over daily money – and what beginners should pay attention to
Money market ETFs are an attractive alternative to money market accounts because they offer similar advantages to money market money, but can often achieve a higher return – and there is no need to regularly search for the best interest rate offers. Since the interest income flows directly into the ETF, the market interest rate is reflected almost one-to-one and interest rate changes by the ECB have a direct impact.
However, there are important points to consider for beginners: With overnight money, the state protects the money through statutory deposit protection up to 100,000 euros per bank – this does not apply to money market ETFs because they are securities. However, the protective regulations of the UCITS fund assets apply to ETFs, which makes them particularly interesting for larger investment amounts.
Practical tips to get you started
To buy a money market ETF, you need a securities account with a broker. The annual running costs for money market ETFs are manageable and usually range between 0.1 and 0.2 percent. Against this background, you should keep an eye on the costs of the fund when making your selection and check the historical performance as an initial indication of the stability of the fund.
Beginners should also pay attention to the currency of the fund: with funds in foreign currencies, you bear the exchange rate risk, which can both increase or reduce the return. If you want to be on the safe side, choose a money market ETF that invests exclusively in euro securities. According to extraETF, money market ETFs also offer professional risk diversification across many short-term securities from different issuers, which reduces the concentration risk of a single bank deposit. However, you should still keep a separate emergency fund for unplanned expenses in a current account.
D. Maier / editorial team finanzen.net