Share ISA that basically acts as a fixed rate cash ISA

jamesmorgan

stg123 wrote: »

Also - jamesmorgan - thanks for your response. How close to your ETFs get to achieving what you were looking for? What return do you get after broker fees/tax?

The returns from the past 12 months have been 7.9% (after fees - but clearly no tax as they are within an ISA). However, I would stress that returns are not guaranteed and will depend on capital fluctuations of the underlying bonds. In theory if you purchase bonds and hold to maturity then your return will be equal to the yield to maturity. When I purchased the EFT, the yield to maturity was around 4.5%. However, with an ETF the bonds held are not fixed. Of particular note is that it only holds bonds with a maturity of 1-5 years (ie any bond is automatically sold when it hits 1 year left to maturity). The capital value of bonds will vary depending on views of interest rates, inflation and the general economy (risk of default). Since I purchased, the capital value has gone up which is why I'm seeing higher returns than expected. As a result the current yield to maturity has fallen to 2.9%.

Based on your stated requirements, I doubt whether bond ETF's are the right option for you. It is of course possible that there are no options that meet your requirements (inflation beating returns after tax with zero risk to capital). You may therefore need to re-assess the relative importance of beating inflation with the risk of potentially losing capital.

MrMalkin

Perhaps a stupid question, but if someone wanted to use up their ISA allowance with a cash-like investment is there any reason not to use a money market fund? Obviously they return a variable rate, which is pretty low these days, close to the base rate, but they do have positive nominal return and they're only very slightly more risky than savings accounts.

le_loup

Are they?
You will find there have been some pretty crook money market funds out there in the past.

jamesd

If the cost of holding the money in a money market fund means you'll make a profit they can be useful. At least some places would charge a 0.5% annualised cost to hold money in a money market fund that's paying less interest than that, so for someone using such a place, it'd be less loss-making to hold the money in cash.

dtsazza

jamesd wrote: »

If the cost of holding the money in a money market fund means you'll make a profit they can be useful. At least some places would charge a 0.5% annualised cost to hold money in a money market fund that's paying less interest than that, so for someone using such a place, it'd be less loss-making to hold the money in cash.

And don't forget that at the moment, the opportunity costs are pretty huge as well.

The whole motivation here is to use the ISA allowance, i.e. to maximise the amount of savings that are not liable for tax. But really, what we're trying to achieve is to maximise the net yield.

The return on MM funds is at the moment quite low. Especially if you compare it to a 3% bog-standard savings account, which will return 1.8% after tax for a higher-rate taxpayer. If the MM fund yields less than 1.8% after expenses, then there's just no point in going for it, and religiously using up all of the ISA allowance is not beneficial. Just stick as much cash as you like in the 3% savings account instead, you'll make a greater return.

(The only reason why thins might be worth pursuing, is in the unlikely situation where you knew you'd max your ISA allowance each year, so didn't want to miss this year's £5640 and were prepared to take a lower rate now, to have more money in the wrapper in future. But since it seems that the OP never intends to "properly" invest in stocks and shares, and since S&S ISA money can't be transferred into cash ISAs, this potential benefit is worthless.)

dtsazza

stg123 wrote: »

I'm only really interested in a product with as close to a fixed return as possible - I'm not really interested in ETFs. I don't want to play the stock market, or the corporate bond market, really.

So to simplify what you're looking for, you want a Stocks and Shares ISA which doesn't invest in stocks and shares (or bonds, or any investments).

Hopefully it is clear to you from that why you aren't going to be successful in your search.

MrMalkin

Thanks for the comments on MM funds, I have no plans to use them myself but I've been wondering why they aren't suggested often here or anywhere else for this kind of situation.

jamesd

For the S&S ISA case there's a better reason not to use a money market fund: they are prohibited investments, only allowed in a cash ISA. This is because they fail the S&S ISA 5% test, having no reasonable possibility of losing at least five percent of the capital.

clairbear_3

You could use a ETF with a decent Yield but hedged with a 'short' ETF that if balanced could provide 'almost risk free' income...simply these are stockmarket related products but the first will make money if markets go up(and provide up to 5% yield)..the second makes money if markets go down.(neutral)