Smart Deposit - The Killer of Savings and Term Accounts
Central banks have raised interest rates significantly. Deposit your money liquidly at market interest rates that banks will not offer you without extra conditions in their checking and savings accounts. Start appreciating even short-term savings. The Conservative Smart Deposit with a 3.8% yield is built on ETFs that aim to replicate the interest rate of central bank and bond ETFs with maturities of up to half a year.
In 2022, central banks began raising interest rates to bring record-high inflation under control. After virtually 14 years of 0% rates, interest rates have risen. Most of us have felt (or will feel on the next anniversary of loan fixation) this rise via a sharp increase in mortgage rates.
However, we shouldn't forget the other side of the scale. Higher interest rates should finally reward savers too. Saving money risk-free is already earning interest around the world - the European Central Bank (ECB) deposit rate is the highest it has been in 20 years!
However, commercial banks are in no hurry to increase the interest on your deposits. Understandably, banks have the opportunity to make money on deposits after a long time. They will not offer you any interest, but they can deposit your funds with the European Central Bank (ECB) or with each other at 3.9%. Just a reminder that currently, Slovaks have around 45 billion euros in bank accounts.
That's why we decided to come up with a product that will reflect the current interest rates and kick-start your money that is currently earning zero return in the bank.
Store your short-term savings liquidly, conservatively, with minimal volatility, and with possible tax exemption. Introducing the killer of term deposits and savings accounts, the Smart Deposit, which gets you money market interest without strings attached and special terms.
What Is the Smart Deposit?
The Smart Deposit is Finax's most conservative investment product with stable returns, designed to store your savings for up to one year. It represents an attractive alternative to current and savings accounts, as well as term deposits.
It uses instruments replicating euro area base interest rates. As a result, its value rises continuously and fluctuates only when interest rates set by the central bank change (see annual chart below).
It is built on ETFs that aim to replicate the central bank's interest rate yield and on bond ETFs made up of the least risky bonds with maturities of up to half a year and the highest ratings.
With a short lag, the Smart Deposit's yield reflects the ECB's base deposit rate minus the funds' and Finax's fee. The Smart Deposit chart shows when the rate moved into positive numbers.
The ECB first raised interest rates in July 2022. That's when the deposit rate hit 0% and then the central bank raised it to 0.75% in September. After that, the underlying Smart Deposit funds started to earn. As the ECB continued to raise interest rates, the returns of interest rate-linked funds also accelerated. Until autumn 2022, such funds were replicating the negative interest rates we had experienced in Europe for over 8 years, hence the value of the funds had been falling for several years until then.
Note the scale of the vertical axis. The difference between the lowest and highest value is roughly 1.5%. Volatility is almost non-existent on the Smart Deposit.
Advantages of Smart Deposit
- The possibility to earn a market interest rate close to the ECB base deposit rate.
- The current yield is 3.8% p.a.* (as of 20.9.2023) - variable depending on the development of the ECB interest rates.
- Minimum volatility.
- Lowest risk 1 on the 7-point SRI scale.
- One low fee - 0.5% p.a. including VAT for portfolio management.
- No strings attached with weekly liquidity.
- Tax benefits for Slovak tax residents applicable upon blog publication:
- After 1 year of investing the funds, the proceeds are exempt from taxes and levies.
- For withdrawals up to 1 year, returns up to EUR 500 are exempt from tax.
*Expected return is calculated as the weighted average of the current Euro Short Term Rate (€STR), which is replicated by 59.4% of the Smart Deposit portfolio, and the average yield to maturity of bond ETFs (40%), less the ETF fee. The return excludes Finax's portfolio management fee of 0.5% p.a. including VAT. Future performance is subject to change. Tax treatment depends on each client's individual circumstances and may change in the future.
For better clarity, we have prepared an overview of the average interest rate on savings accounts and time deposits in the six largest banks in Slovakia (Tatra banka, Slovenská Sporiteľňa, VÚB, ČSOB, Unicredit, and Prima). These banks cover more than 80% of the Slovak market.
If you would like to go really in-depth with the information and want to learn as much as possible about this product, feel free to read on. For the busier ones, I'm just offering a quick overview of the basic facts along with a link to the parts that may be of interest to you.
Who is Smart Deposit suitable for? Anyone who doesn't want to take the higher risk of more dynamic portfolios, wants to keep their money available, and wants to see it appreciate significantly more than banks offer today.
What is the composition of the Smart Deposit? 60% of the portfolio is made up of two overnight ETFs and 40% is made up of short-term bond ETFs.
Can the ECB change the level of interest rates? The ECB meets roughly once a month, at which time they can revise base interest rates. Changes in interest rates form the largest component of the risk of this product.
Should I invest in a Smart Deposit or an Intelligent Wallet? Both products are short-term. If you don't want to tie up your deposits in any way, choose the Smart Deposit. Intelligent Wallet is better suited for a horizon of 1 to 3 years.
If you are interested in more details, the following information is for you.
Who Is the Smart Deposit Suitable for?
Based on the nature of the Smart Deposit, its use is suitable as an alternative to bank deposit products, whether it is a current, savings, or term account. To get a similar return at a bank, you would need to tie up the money for a number of years. However, with a Smart Deposit, you'll get a similar return with virtually immediate availability of money.
The Smart Deposit is ideal for short-term money storage. Slovak households still hold more than €45 billion in banks, and for a large proportion of them, Smart Deposit is a much more interesting destination.
You can also use Smart Deposit as an emergency fund, to save for holidays, Christmas presents, taxes, or to buy and pay for anything that you will be paying for within a year. With minimal fluctuations, you don't have to worry about having less money in your account when you want to withdraw.
Despite the obvious disadvantages and inflation, many people still feel the need to keep a larger amount in cash or in a checking account at the bank. A similar thing applies to money that we don't know when we will use. With weekly liquidity, the Smart Deposit is a suitable destination for a large portion of these funds.
It is also interesting for the placement of corporate earnings and reserves. We remind you that for the time being, we allow legal entities to open an account in Finax with a minimum amount of 50 thousand euros. We are pleased that several companies with deposits of over EUR 1 million have already used this product in the test run.
How Do I Open a Smart Deposit?
If you are not a Finax client, click on our Get Started page or on the Open a Smart Deposit button. Opening a Smart Deposit account is very easy and will take 10 minutes of your time.
Soon it will also be possible to open a Smart Deposit account in the Finax mobile app.
At the start of the registration process, choose Smart Deposit as your goal. You'll go through a short questionnaire, verify your identity, fill in your personal details, sign an online contract, send money and you can start building up your savings. You'll track their growth conveniently online in the mobile app or on the Finax website.
Existing clients can simply add an account by clicking the Open New Account button in the Account Overview section after logging in on the website.
All the benefits and characteristics of the Smart Deposit are derived from its composition, i.e. the underlying assets on which this conservative investment product is built.
The portfolio consists of four ETFs - two funds replicate short-term interbank interest rates and two funds invest in short-term bonds with maturities of up to half a year.
30% of the portfolio is invested in an ETF fund focused on short-term euro government bonds. These are investment-grade bonds of Eurozone countries with maturities of up to 6 months, the safest securities Europe has to offer. Specifically, the fund invests in bonds of countries such as Germany, France, the Netherlands, Italy, Spain, Belgium and Portugal.
10% of the value of the Smart Deposit is made up of short-term euro-denominated corporate bonds rated in the investment grade range (identical quality to the government bonds mentioned above). The average maturity of these bonds is up to half a year. The fund is well diversified both sectorally and regionally.
In both bond ETFs, the average maturities and durations are so short that the prices of the covered bonds do not react to rising interest rates by falling, but rather by rising. The yields of very short bonds are positively correlated with interest rates and reflect the path of interest rates with a small time lag.
59.4% of the initial holdings consist of two ETFs that replicate the yields of the Euro Short Term Rate (€STR). This rate tells at what interest rate banks lend each other excess liquidity overnight (called overnight deposits and rates).
This interest is derived from the ECB base deposit rate and is also influenced by liquidity and other conditions in the interbank market. The €STR itself is not an investable asset. It is set by the ECB on the basis of interbank market developments as an average of banks' overnight deposits.
These funds replicate this rate through so-called swaps (futures contracts). They are ETFs synthetically replicating an index. We used to see these funds as riskier as the investor bore the credit risk of the counterparty (the bank) in addition to the market and interest rate risk. However, this has changed. Regulation now allows retail UCITS funds only a limited uncovered derivative position per counterparty, which reduces credit risk significantly.
How Does the Change in Interest Rates Affect the Smart Deposit?
Base interest rates set by the European Central Bank are a key factor affecting the return on the Smart Deposit. Given its focus on short-term interest income, the expected appreciation is directly proportional to the evolution of the ECB's interest rate policy.
An increase in interest rates will translate relatively quickly into a higher yield on the Smart Deposit. In the case of ETFs replicating the overnight rate, this is a matter of days. In the case of bond funds, the tightening of central bank policy will be reflected with little delay. The same is true for interest rate cuts.
If the ECB continues to raise interest rates, investors in Smart Deposit will benefit from this action. However, it should not be forgotten that any interest rate cuts will reduce yields.
This is perfectly illustrated by the charts of the Smart Deposit and the underlying ETFs. The modelled evolution of the Smart Deposit portfolio can be found above. In the chart of the individual ETFs below, you can see exactly when interest rates in the Eurozone were raised from negative to positive territory. It was at that moment that these funds began to make money and the money market began to recover after more than a decade.
Risks of a Smart Deposit - Is it as Safe as a Deposit in a Bank?
The biggest risk for the Smart Deposit product is the so-called interest rate risk. If the eurozone economy falls into a deeper recession and the price level starts to stagnate or even fall, the central bank may cut interest rates again, which would be reflected in the future yield of the Smart Deposit.
The risk is therefore falling interest rates, which would mean a lower yield. We will keep investors informed of any change in interest rates and the expected return on the Smart Deposit.
This is confirmed by the PRIIPS risk assessment itself, which assigns all four ETFs the lowest risk of SRI 1 on a 7-level scale.
The credit risk in the Smart Deposit product is similar to the credit risk of a deposit with a bank. Investors also bear counterparty risk, but this is fully hedged. Specifically, for ETFs replicating the overnight interbank offered rate, the counterparty risk arises from the swap contracts through which the fund achieves this return. The counterparties are large banks (e.g. Société Générale, Deutsche Bank, etc.).
Within the Fund, the risk of a single counterparty may not exceed 10%. The swaps are also fully asset-backed. Only a volume of EUR 500 thousand need not be asset-backed in the case of derivatives, which for funds with EUR 1.8 billion in assets under management is a truly negligible amount.
In the event of a counterparty default, the assets of the exchange basket (high-quality bonds or equities) remain in the assets.
What Is the Difference Between the Smart Deposit and the Intelligent Wallet?
Although both the Smart Deposit and the Intelligent Wallet are conservative short-term products, there are fundamental differences between them.
The Smart Deposit product includes a 10% equity component, which is designed to provide a higher return over the long term than bank deposits. At the same time, the bond component is built on longer-dated bond ETFs, which carry slightly higher risk but also provide a higher return over the long term.
The Smart Deposit is thus particularly suitable for clients with an investment horizon of 1-3 years who would like to earn a slightly higher return than what is offered today by the Smart Deposit.
I believe that our novelty will appeal to you. We see it as a significant milestone, on the level of launching Intelligent Investing or obtaining permission to sell the European Pension.
Once again, Finax is bringing you something that is normally very hard to get on the market. If you want to get a similar interest rate at a bank, you have to tie up your funds for several years or the terms are limited to a certain amount.
Enjoy market interest with Finax, getting all the benefits our investing and ETFs offer. We will be happy to answer any questions you may have. Feel free to contact us on 02/210 099 85 or email your question to email@example.com.