Cash equivalents for EU investors

From Bogleheads
Euflag.jpg This article contains details specific to investors in the European Union (EU). However, it is not intended for residents of the EU who are also United States (US) citizens or US permanent residents.

Cash equivalents for EU investors discusses investments which have performance similar to cash for EU and other non-US investors.

Investors hold cash investments for a number of reasons. For example, as an emergency fund, to cover obligations in the short to intermediate term timeline, and more generally as part of the fixed income portion of a portfolio next to bonds. During the withdrawal stage, cash can offset any draw-down to avoid selling equities during a long market downturn.

Introduction

See also: Cash equivalent

In investing, 'cash' is a collection of short-term investment instruments that are highly liquid and easily converted into ready cash. Collectively, these investments make up the money markets. These investments' short-term nature means that they rapidly adjust to changes in short term interest rates.

Cash includes familiar bank accounts, such as transaction and savings accounts, as well as short term bank certificates of deposit (CDs). It also includes a number of marketable liquid securities bought and sold on the money markets. These include treasury bills, institutional large bank CDs, commercial paper, bankers acceptances, and repurchase agreements (repos).

Role of cash in long-term portfolios

Portfolios designed for retirement go through an accumulation stage, where assets grow because of new contributions and portfolio returns, and then transition into a withdrawal stage. How important cash is in these long-term portfolios varies from next to no role at all to an important role, especially during the withdrawal stage.

You might hold cash investments for several reasons, ranging from an emergency fund for liquid emergency reserves, through cover for obligations in the short to intermediate term timeline, to an integral portion of your portfolio next to bonds where bonds have a low yield and might be subject to future lower bond prices. In these cases, cash, with the guarantee that many governments give, could be useful for the stable part of your portfolio.

In the withdrawal stage, holding cash can offset any portfolio draw-down, which helps you avoid selling equities during a long market downturn.

EU banking background for the retail investor

There are some differences between the various cash instruments in the different world regions. The US system is probably the most developed, and offers the widest choice to investors. Outside the US the picture is quite different and varied. This section looks at the options available and their relevance to EU investors.

For EU investors the situation remains quite fragmented, which makes it difficult to apply guidelines for the entire EU. Many countries have their own specific account types, available only to residents.

You can find alternatives to interest paying instant access bank accounts, but you need to investigate them carefully before investing. You may find it hard to access some of these, for example some money market funds, and you may need to take advice from a qualified and certified adviser. Although these investment assets -- such as money market funds, short term bonds and ultra short term bonds -- have lower risk than equities and long term bonds, they still have capital loss risks.

You can buy cash equivalents (see note on bank accounts below), such as certificates of deposit or short term bonds, either directly, or within a fund, for example a short term bond fund. Except for the examples given below, this article does not describe purchasing cash equivalents directly in detail.

Holding fixed term accounts in qualifying EU based banks gives you cover from the deposit guarantee rules.

Tax note

The taxation of shorter term bonds and money market instruments is beyond the scope of this article.

For bank deposit accounts, you need to comply with your local country tax laws, assuming that accounts can only be opened and maintained by local residents.

This article assumes that within UCITS ETFs, the asset manager handles any US tax, and you pay local tax (if any) on the fund gains.

The broad assumption is that publicly traded bonds (of any duration) and CDs (or any money in a bank account) are not considered "US situs" property.

Bank accounts

The different jurisdictions (27 nations) and the various banking systems across the EU vary too widely to describe here in great detail; it would take a full separate country by country study to uncover which would be best. Although this article does not aim to cover all the bank account solutions you might have, there are some examples that are worth citing to demonstrate practical solutions available in some countries. See the section on fixed term bank accounts below.

It is difficult to open and maintain a non-resident bank account in Europe, so you will probably need to stick to accounts in your own country. The documentation requirements increase constantly, and banks will ask non-residents for credit and background checks in order to comply with Know Your Customer (KYC) requirements. There appear to be some exceptions to this in the case of Raisin, Medirect Bank and others (see note below).

The EU's deposit guarantee system is not comprehensive, and if you hold large amounts of cash the bank guarantee system can be problematic, especially where you want a lower risk level.

EU investors are more restricted than US investors in their ability to keep large cash amounts in fixed duration accounts or certificates of deposit. The upper threshold for protection in the EU is €100,000 per bank per individual, whereas in the US that amount is $250,000 per depositor per bank per account category. In addition, in the US it is possible to hold up to substantially more than $250,000, so that using no more than two or three banks an amount of cash, around US investors can safely hold $1,000,000. In the EU this is more difficult and time consuming.

See note below on the EU deposit guarantee system, which may prompt you to look for alternatives.

Fixed term bank accounts

Below are some examples of local European banks and their current fixed term offerings are given below. As more information becomes available, further examples can be included. These examples are not intended to be comprehensive or to give any indication of the ratings and security of the banks or the competitiveness of their offerings. The rates and terms on offer may change and details should be carefully reviewed prior to any commitment. These accounts are covered by the EU deposit protection system in the same way as any other bank account.

  • TheBanks.eu is an independent Internet project aiming to provide accurate and up-to-date information about banking services in European countries and their dependent territories in order to help potential investors to find a bank satisfying their requirements.
TheBanks.EU collects information from various sources about economies, taxation, banking sectors of European countries, analyses it, focusing on estimating reliability and profitability of investments, and represents the information in an easy-to-understand manner.

Online banks

The following banks operate across borders at least within the EU region. Access to these banks has not been checked comprehensively, so if you are considering using any of the banks for fixed term deposit accounts, investigate the bank's requirements for account opening, the fees and charges if any, the pedigree of the bank, and its participation in the EU deposit guarantee system, some or all of which may be country specific.

  • Raisin provides a pan Europe bank account access facility. Residents of an EU or EEA country (with the exception of Belgium and Ireland), or Switzerland or the UK, who are at least 18 years of age and acting on their own behalf, will be able to open a Raisin account. This account then gives access to a range of banks across Europe that offer different deposit accounts. Raisin state that each of the banks has been vetted by them and that they are members of their respective countries deposit guarantee scheme.
  • Medirect Bank provides online fixed term savings accounts. Accounts are available to both EU citizens and expat EU citizen and are subject to Bank’s review and acceptance. According to Medirect Bank's website; all MeDirect accounts are guaranteed up to €100,000 by the Malta Financial Services Authority (MFSA) under the Depositor Compensation Scheme. In addition it states that interest income earned on Investment Cash Accounts, Savings Accounts, Me1 Savings Accounts, Me6 Savings Accounts, ME3 Savings Accounts, Me12 Savings Accounts, Fixed Term Deposits and NOW Accounts is not subject to foreign withholding tax. The main ownership of Medirect Bank is with AnaCap Financial Partners LLP, a UK private equity firm.
  • Fimbank Direct provides online fixed term savings accounts and is primarily designed for use by mobile phone users. According to FIMBank's website, FIMBank is based from Malta and provides online fixed term deposit accounts. FIMBank PLC is a participant of the Depositor Compensation Scheme in Malta, established under the Depositor Compensation Scheme regulations, 2015 ('the Regulations'). The Malta Depositor Compensation Scheme covers deposits in any currency up to €100,000 or equivalent. The main ownership entities of FIMBank consist of United Gulf Holding 78.66%, Burgan Bank K.P.S.C. 8.5%, and Tunis International Bank 1.76%.

Offshore banks

There are some traditional banks that provide offshore banking services through subsidiaries that are located in jurisdictions such as Isle of Man, Jersey, and so on. A few of these are listed below for information.

  • Skipton International provides a range of easy access, notice and fixed term "bond" accounts. It offers accounts to most expatriates with the exception of a specific list of countries: Country Limitations. The accounts have to be held in sterling which may not suit all savers. Skipton International is established in Guernsey and is a bank wholly owned by Skipton Building Society, the fourth largest building society in the UK. Skipton International is supervised by the Guernsey Financial Services Commission, and is a participant in the Guernsey Banking Deposit Compensation Scheme up to a maximum of £50,000. For joint accounts the compensation is available per person. Deposits made with Skipton International are not covered by the Financial Services Compensation Scheme established under the UK Financial Services and Markets Act 2000.
  • Santander International offers banking and savings accounts for UK expats living or working overseas. They also offer international banking and savings accounts for UK resident, non-domiciled customers.

France

  • Quelle banque choisir is a comparison website that provides information on banks and the available accounts and interest rates in France.

Germany

  • Check24 provides a comparison site for bank accounts across Germany. You can use the site to access accounts across Europe generally.
  • Banks - Germany provides an overview of the account types available in Germany, and also provides a comparison of various rates and terms on offer for different competing banks' fixed term deposit accounts.

Netherlands

  • FX.nl is a comparison website that provides an overview of all banks and their account types in the Netherlands.
  • LeasePlan is a Netherlands bank that has an online only savings account with an interest rate starting at 0.35%. Once you have opened a "standard" savings account, this allows you to move the money in and out and then you can open deposit accounts with different durations and interest rates. Minimum investment in these deposit accounts is €1,000, which is flexible enough to build a ladder. For example, you could buy seven deposits of €1,000 each from six months to five years. Rates lower than a normal savings account will be unattractive.

Spain

  • Rastreator.com is a comparison website that provides an overview of all banks and their account types in Spain.
  • beemy is a comparison website that provides an overview of all banks and their account types in Spain.

United Kingdom

The UK left the EU in January 2020,[1] but remains closely connected to the EU financial system.

  • Compare the Market provides an overview of the account types available in the UK and also provides a comparison of various rates and terms on offer for different competing banks' fixed rate deposit or bond accounts.
  • National Savings & Investments (NS&I) is a government backed institution that offers various savings products, some of which are tax free. NS&I is not strictly speaking a bank, but it is both a government department and an Executive Agency of the Chancellor of the Exchequer.

Customers who invest in NS&I products are effectively lending to the UK Government, which goes towards the public purse. In return, the Government pays interest (or prizes for Premium Bonds). NS&I offers 100% security on all deposits. Most NS&I products generate taxable interest, but Premium Bond prizes are tax-free to UK residents.

The UK bank Metro Bank PLC offers a suite of deposit accounts and bonds which follow an ascending interest rate and increasing duration that could act as a ladder. An instant access savings account will need to be opened prior to the fixed term deposit accounts.

Deposit insurance

US deposit guarantee system

In the US the Federal Deposit Insurance Corporation (FDIC) system gives significant protection to ordinary investors for their deposits. The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.[2]

EU deposit guarantee system

In the EU there is a similar system to the US, providing a €100,000 deposit guarantee per depositor per bank, but it is much less generous and is confined to participating banks. This means that if you want to hold accessible and secure cash amounts over €100,000, you can face significant deposit risks. The Deposit Guarantee Schemes (DGS)[3] reimburse a limited amount to compensate depositors whose bank has failed. Banks entirely fund Deposit Guarantee Schemes, so that there is no cost for taxpayers.

Under EU rules, deposit guarantee schemes aim to:

  • protect depositors' savings by guaranteeing deposits of up to €100,000
  • help prevent the mass withdrawal of deposits in the case of bank failure, which can create financial instability

In 2014, the EU adopted Directive 2014/49/EU. It requires EU countries to introduce laws setting up at least one deposit guarantee scheme that all banks must join. EU countries must

  • ensure a harmonised level of protection for depositors
  • produce lists of the types of deposits that are protected

The protected funds are limited in Europe, and you need to be careful as the compensation amount is set per financial institution, and some financial groups might count as one. For example, in the UK, Lloyds, Halifax and Bank of Scotland count as one institution, as do HSBC and First Direct, whereas RBS and NatWest count as two.

Cyprus "haircut"

Deposit protection depends on specific EU country regulations. The threat to investors deposits in EU country banks is not theoretical. In Cyprus in 2012 - 2014, the "Troika" of creditors agreed the final deposit levy on Cypriot accounts was to be 47.5% for shareholders, bondholders, and depositors with more than €100,000 in the two largest Cypriot banks.[4] The "Troika" is the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF).

The levies placed on large depositors were used as equity to recapitalize the bank, following a decision reached in March 2013 as part of the bailout package for Cyprus.

As a condition for receiving a $13 billion (€10 billion) bailout package, Troika lenders forced Cyprus to sponsor a portion of their bailout, which they raised by levying shareholders, bondholders, and depositors with more than €100,000 in accounts.

This example shows that if you want to hold substantial cash amounts for whatever reason, you need to manage things carefully to avoid running into this type of problem.

Money markets

The money market is where financial instruments with high liquidity and very short maturities are traded. Participants use it as a way to borrow and lend in the short term, with maturities that usually range from overnight to just under a year. The most common money market instruments are eurodollar deposits, negotiable certificates of deposit (CDs), banker's acceptances, U.S. Treasury bills, commercial paper, municipal notes, federal funds and repurchase agreements (repos).

Money market transactions are wholesale, meaning that they are for large denominations and take place between financial institutions and companies rather than individuals. Money market funds offer individuals the opportunity to invest smaller amounts in these assets.

Money market funds

A Money Market Fund (MMF) is a type of mutual fund.[5]

Money market funds issue shares to investors to finance their activities, offering a high degree of liquidity, diversification and market-based yields.

The value of their shares fluctuates in line with the price of the debt instruments in which they have invested. They have to maintain a high level of asset liquidity to be able to meet daily redemptions by their investors.

There are three types of money market fund available in the EU, these are:

  • Treasury bills
  • Commercial papers
  • Certificates of deposit

These money market funds are further categorised by their risk profile into:[6]

  • Public debt constant net asset value
  • Low volatility net asset value
  • Variable net asset value

These funds are managed by asset managers who are either controlled by banks or by independent entities. The expenses associated with these funds can vary widely from asset manager to asset manager. Some funds require entry premiums, and you should always carefully check the fund's expense ratio.

Institutions and large corporate bodies use EU money market funds to place shorter term cash. Individual investors can purchase money market ETFs through online platforms and through financial advisers. The following table shows a selection of money market funds:

Money market fund Identifier Fund information
Franklin Euro Short-Term Money Market Fund ISIN LU0454936104 Accumulating, Eonia Cash Index. Size €105M. 0.31 year average duration, OCF: 0.35%
Premier UK Money Market Fund, Class A ISIN GB0007061152 Accumulating, OCF: 0.58%.
HSBC Euro Liquidity Fund C ISIN IE0030819498 Accumulating, OCF: 0.13%
Morgan Stanley Euro Liquidity Fund ISIN LU0875333444 Low Volatility Net Asset Value (LVNAV), Minimum Initial Investment: €1,000,000, TER: 0.09%.
Northern Trust Euro Liquidity Fund Class A ISIN IE00B7Y8R850 Designed for institutional investors including: multinationals, pension funds, insurance companies, sovereign wealth funds, charities and subadvisory, OCF: 0.20%
BlackRock ICS Euro Liquidity Fund ISIN IE0005023910 Accumulating, Minimum Initial Investment €1,000,000, OCF: 0.20%
Blackrock Global Funds Euro Short Duration bond fund ISIN LU0329592371 Accumulating, Initial charge: 5.00%. Minimum investment of €100,000, OCF: 0.55%

Certificates of deposit

The term 'Certificate of Deposit' or CD refers to money market instruments of relatively short duration or savings accounts that pay a fixed rate of interest until a given maturity date. Also, you cannot usually withdraw funds placed in a Certificate of Deposit before maturity; although sometimes you can withdraw them with advanced notice, or after paying a penalty, or both.

Certificates of deposit are typically known as term deposits in countries like Australia, Canada and New Zealand, as time deposits in Asia, CDs in the United States, as fixed rate bonds in Great Britain, and as term accounts or fixed deposits in some other countries.

Cash on deposit in trading platforms

It is worth noting that platforms will normally keep cash you hold with them in a money market account or similar. You need to check the details on this if you are holding a large amount, so that you can understand any risks from this.

EU money market regulation changes

The regulatory regime for money market funds went through significant changes from the EU Money Market Fund Regulation (MMFR) which applied from 21 July 2018. Existing money market funds benefitted from an 18-month transitional period and had to comply by 21 January 2019. Under the MMFR, a money market fund may be established as:

  • a Public Debt CNAV money market fund;
  • a Low Volatility NAV (LVNAV) money market fund; or
  • a variable NAV (VNAV) money market fund.

The Public Debt CNAV money market fund will value assets using amortised cost accounting, and must invest 99.5% of its assets in government backed securities.

The LVNAV can use amortised cost accounting to value assets that have a residual maturity up to 75 days, while other assets must be valued at mark-to-market or mark-to-model. The LVNAV may display a stable share price per unit or share as long as this does not deviate by more than 20 bps from the price per unit or share, as calculated under the mark-to-market or mark-to-model methodology.

Alternatives to money market funds for EU investors

If you are looking for alternative cash assets with lower levels, there are alternatives that may be appropriate other than bank deposit accounts and money market funds. This approach may be useful if you want to maintain or reduce your lower risk exposure while avoiding any possibility of capital loss through bank haircuts.

In addition, using these assets can be part of your process of holding capital prior to investing. Short term bonds and ultra short term bonds may be worth a look, although there are risks attached to holding these assets which could lead to loss of capital.

There are a number of considerations if you are thinking of investing in short term or ultra short term bonds:

  • Home currency and hedging
  • Expense ratio (TER)
  • Sterling investors may prefer gilts
  • Home country tax may affect choosing between accumulating or distributing versions (if they exist)
  • Low return rates of some bonds including negative returns
  • The risk profile of government bonds and corporate bonds
  • Alternative local fund options that may be available in some individual countries
  • Pension fund options (where they exist) may offer simplicity and tax efficiency

Short term bonds

If you want capital preservation, you may try to focus some part of your portfolio allocations on minimal-risk investment options, including cash, money markets, certificates of deposit (CDs) and bonds. Short-term bonds fall on the safer end of the debt risk spectrum due to their short duration and near-cash status. A shorter duration or maturity date leads to less credit risk and less interest rate risk. The choice of bond will affect the risk level, with government treasuries presenting less risk than corporate bonds.

The table below lists some short term bond funds available to retail investors:

Short term bond fund Identifier Fund information
iShares Euro 1-3 Year Government Bonds ISIN IE00B3VTMJ91 Accumulating, hedged, UCITS ETF (CSBGE3), TER: 0.20% (33% Italian bonds)
iShares Euro 1-3 Year Government Bonds ISIN IE00B14X4Q57 Distributing, UCITS ETF, (IBGS), TER: 0.20%
iShares USD 1-3 Year Treasury Bonds ISIN IE00BDFK1573 Accumulating, hedged, UCITS ETF (IBTE), TER: 0.22%
iShares Euro Corporate Bond 1-5yr ISIN IE00B4L60045 Distributing, UCITS ETF (SE15), TER: 0.20%
Vanguard USD Corporate 1-3yr Bond ISIN IE00BDD48R20 Distributing, UCITS ETF (VUSC), TER: 0.15%
Invesco US Treasury Bond 1-3 Year ISIN IE00BF2FNG46 Accumulating, UCITS ETF (TRE3 LN), TER: 0.06%
SPDR Bloomberg Barclays 1-3 Year US Treasury Bond ISIN IE00BC7GZJ81 Distributing, UCITS ETF (TSY3), TER: 0.15%
iShares USD Short Duration Corporate Bond ISIN IE00BYXYYP94 Accumulating, UCITS ETF (SDIA), OCF: 0.20%
iShares USD Short Duration Corporate Bond ISIN IE00BCRY5Y77 Distributing, UCITS ETF (SDIG LN), TER: 0.20%
iShares USD Corporate Bond ESG 0-3yr ISIN IE00BG5QQ390 Accumulating, hedged, UCITS, ETF, (IU0E) TER: 0.17%, SRI

For any ETF choice, check that the currency, accumulating or distributing status, hedging, exchange are compatible with your needs and provides the most cost effective solution.

Ultra short term bonds

Ultra-short term bond funds are bond funds that invest only in fixed-income instruments with very short-term maturities. An ultra-short bond fund will ideally invest in instruments with maturities up to around one year. This investing strategy tends to offer higher yields than money market instruments, with fewer price fluctuations than a typical short-term fund. Ultra short term bonds are not money market funds and are not subject to the special regulatory requirements (including maturity and credit quality constraints) designed to enable money market funds to maintain a stable share price.

Ultra-short term bond funds give you more significant protection against interest rate risk than longer-term bond investments. As noted above, ultra short term bonds are normally more risky than money market instruments, partly because money market funds generally are required to invest in specific assets including government debt, corporate debt, while ultra short term bond managers have a wider remit and are not subject to the same regulations as money market funds.

Ultra short term funds Identifier Fund information
iShares Euro Ultrashort Bond ISIN IE00BCRY6557 Accumulating, UCITS ETF (ERNE), TER: 0.09%
SPDR Bloomberg Barclays 1-3 Month T-Bill ISIN IE00BJXRT698 Accumulating, UCITS ETF (ZPR1), TER: 0.10%

Suggested suite of cash equivalent funds for EU retail investors

If you want a cash equivalent, you might consider using one or a combination of funds from the above asset categories. The following table shows a short list of possible candidates for a range of cash equivalent funds. Considerations include:

  • Expenses
  • Hedging to home currency
  • Sterling investors may prefer gilts
  • Check for "hidden" charges such as exit premiums
  • The funds may be negative

Reputable managers provide these funds, and they have reasonable expenses without entry or exit premiums:

Category Fund Identifier Fund information
Money market fund Franklin Euro Short-Term Money Market Fund ISIN LU0454936104 Accumulating, Eonia Cash Index. Size €105M. 0.31 year average duration, OCF: 0.35%
Short term government bonds Shares Euro Government Bond 1-3yr ISIN IE00B3VTMJ91 Accumulating, UCITS ETF (CSBGE3), TER: 0.20% (33% Italian bonds)
Short term USD government bonds SPDR Bloomberg Barclays 1-3 Month T-Bill ISIN IE00BJXRT698 Accumulating, UCITS ETF (ZPR1), TER 0.10%
Short term government bonds SPDR Bloomberg Barclays 1-3 Year US Treasury Bond ISIN IE00BC7GZJ81 Distributing, UCITS ETF (TSY3), TER: 0.15%
Short term corporate bonds iShares Euro Corporate Bond 1-5yr ISIN IE00B4L60045 Distributing, UCITS ETF (SE15), TER: 0.20%
Short term corporate bonds Vanguard USD Corporate 1-3yr Bond ISIN IE00BDD48R20 Distributing, UCITS ETF (VUSC), TER: 0.15%
Ultra short term corporate bonds iShares Euro Ultrashort Bond ISIN IE00BCRY6557 Accumulating, UCITS ETF (ERNE), TER: 0.09%

See also

References

  1. ↑ "Brexit". Wikipedia. Retrieved September 24, 2020.
  2. ↑ "Understanding Deposit Insurance". FDIC. Retrieved September 23, 2020.
  3. ↑ "Deposit guarantee schemes". European Commission. Retrieved September 23, 2020.
  4. ↑ "Central Bank agrees 47.5% Bank of Cyprus haircut with creditors". EUbusiness. Retrieved September 24, 2020.
  5. ↑ "Money market funds: key facts and figures - Consilium". Council of the European Union. Retrieved September 23, 2020.
  6. ↑ "Money market funds in the EU - Consilium". Council of the European Union. Retrieved September 23, 2020.

External links

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