Beat cash with an active ETF

Money market and currency funds can offer higher yields, but the active versions may have high fees and currency funds in particular are high risk. (Read more on money market and currency funds).

However, Pimco Sterling Short Maturity Source ETF, which looks to make a greater income and total return than money market funds, could be an option. This exchange-traded fund (ETFs) offers the benefits of an active fund manager with the structure and low costs of an ETF. Its low-cost total expense ratio (TER) of around 0.35 per cent makes it much cheaper than active bond funds and some money market funds, but remember that you will have to pay your stockbroker trading fees on top of this annual charge.

Pimco Sterling Short Maturity Source ETF aims to maximise current income while preserving capital and maintaining a high degree of liquidity. It mainly invests in short-term investment-grade debt (BBB or higher) denominated in sterling. These can include government and agency bonds, corporate debt and asset-backed securities. It can invest up to half its assets in other G7 currencies but these are hedged to sterling. Underlying holdings are disclosed on a daily basis.

The fund can also get exposure to investments via derivatives such as forwards and has the option of investing up to 5 per cent of its assets in emerging market fixed income.

"With a current yield to maturity of 1.1 per cent and duration of 0.25 per cent a year, Pimco Sterling Short Maturity Source ETF presents an attractive proposition," says the fund's manager, Mike Amey, head of sterling portfolios at bond specialist Pimco. "We believe that short-dated sterling rates will remain low for a multi-year period and, as such, investors will increasingly look to achieve higher yields within a high-quality, secure and well-diversified portfolio."

This is a physical fund that buys the assets it invests in rather than getting its returns via a swap like many ETFs, so it does not incur counterparty risk or involve any complicated structuring.

Although the fund is domiciled in Ireland it has UK reporting status so you incur capital gains rather than income tax when you sell its shares, which you can offset against your annual £10,600 allowance. The fund can also be held in an individual savings account (Isa).

Asset manager 7IM has recently invested in the fund. "There are a lot of cash ETFs available to investors, however Pimco Sterling Short Maturity Source is distinctly different from any others in that it is designed to deliver enhanced yield while maintaining high levels of security and liquidity," says Justin Urquhart Stewart, managing director at 7IM. "As such, it is an essential tool for cash allocation in any balanced fund."

The portfolio's average duration varies according to asset manager Pimco's economic forecast and active investment process, but cannot be longer than one year, while the weighted average maturity is not expected to exceed three years.

The fund is not a direct substitute for cash because it invests in bonds, albeit low-risk ones, uses derivatives and may incur capital loss. It is also relatively new, so whether it will deliver on its aim is yet to be seen. But for investors who want a low-risk haven while waiting for opportunities to buy back into equities, this looks more attractive than traditional money market funds. BUY

Source: Source (as at 12 September 2011)

TOP TEN HOLDINGS as at 12 September 2011

Asset allocation