Our Q&As are emailed in our Saturday Morning Report, find the answer to this question below.
Hi Team, You recently covered AAA as a place to park spare cash. When does income start and end and for what period? How does income get paid ? Why does the security price move ? What is a comparable risk rating for AAA vs eg a Bank Bond? Are there any catches to using AAA ? Thanks, Simon
Hi Simon,
AAA earns interest every day by investing in deposits with major Australian banks. Income starts accruing from the day you buy units and stops when you sell. Interest is earned daily, including weekends and public holidays, and paid to investors monthly. There is no minimum holding period, although you generally need to own the ETF before the ex-distribution date to receive that month’s distribution.
Unlike shares or bond ETFs, AAA’s unit price follows a predictable pattern. It gradually rises throughout the month as daily interest accrues, then drops by roughly the distribution amount on the ex-distribution date when that income is paid out.
AAA’s yield moves with Australian short-term interest rates. As the RBA raises or cuts the cash rate, the interest earned on the underlying bank deposits adjusts accordingly, so monthly distributions rise or fall. Investors currently receive a floating yield linked to cash rates rather than a fixed return.
AAA is designed as a cash management ETF, making it lower risk than a bond fund. Because it invests in short-term bank deposits, it has virtually no interest rate (duration) risk, so its price is far more stable than a traditional bond. However, unlike a personal bank account, AAA is not covered by the Australian Government’s $250,000 Financial Claims Scheme, as the deposits are held by the fund rather than individual investors.
AAA is best suited for investors seeking capital stability and regular income. Returns will fall if the RBA cuts interest rates, and because the ETF trades on the ASX, investors should also consider bid/ask spreads and the timing of buying or selling around the monthly ex-distribution date.
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