I have a friend who is an absolute whizz at managing her money and getting the most out of it. And she’s not even picking stocks or ETFs; she’s managing what she can in terms of earning interest on cash stashed in an emergency account.
She is constantly checking the different rates being offered. What was a good offer a year ago may no longer be as thrilling. For example, at the start of 2024 a certain fixed savings account she had offered the best rate. That rate has dropped since then and is now pretty average.
Banks may at times want more deposits, so they’ll increase the rate offered for savings. If they want fewer deposits, they’ll just drop the rate. Keeping an eye on things means you have to move money around, but you’ll always secure a top rate.
At the moment, several accounts are offering interest rates of around 7%. That’s a pretty good real return in a 3% inflation environment.
But of course, that 3% inflation world is fading fast as fuel price increases push prices higher.
Bank savings accounts are very safe … Bonds, which are what most income ETFs invest in, carry risk
With this in mind, my friend recently shopped around the listed ETFs to see what she could find, and things got interesting. On the surface, there are some good yields, from about 8.5% to over 9% — better than the 7% or so from the banks.
But things quickly get blurry. First, those yields are historic; it’s not guaranteed that they’ll be repeated in the year ahead. Of course, a bank can also adjust the interest rate it’s offering, but that’s a bigger step than a yield drifting down.
Second, whereas a savings account at a bank is usually free, ETFs have costs. Even a cheap 0.5% transaction fee on both the buy and sell side suddenly means you’re down 1% on the deal. This is not a worry if you’ll be holding for a decade and it works out at 0.1% a year. But if you’re only going to hold for a year, your yield of 9% just dropped to 8%.
Also, you have the spread to cross. This is the difference between the selling and buying prices. In most cases, it’s probably less than 1%, usually about 0.5%. Then add a total expense ratio of about 0.5% and suddenly you are back at bank rates.
Bank savings accounts are very safe, and with the introduction of corporation for deposit insurance there is a R100,000 guarantee for the funds. Bonds, which are what most income ETFs invest in, carry risk. And it’s not only default risk, which is generally very low, but risk of capital loss as they trade in the secondary market.
So, my smart friend has long decided that for short-term savings, banks are best. But always check the rates for changes.
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