Why is CSH2 outperforming SONIA?

artyboy

So based on the data I have over the last 6 months, SONIA has averaged 3.76% annualised.

If CSH2 was tracking it accurately, I'd therefore expect a 6 month return of 1.88% before charges. Instead, Trustnet is telling me that the actual 6 month return is 2.0%, while Freetrade (where I have my largest holding) says it's actually 2.09%

Maybe not a massive outperform to the benchmark, but just curious as to what might be driving this, especially given the synthetic nature of this ETF…?

dunstonh

Amundi Smart Overnight Return ETF is a synthetic ETF, and does not use physical replication. It uses swap contracts rather than actually putting the money in deposits. This makes it higher risk than short-term money market funds that hold physical deposits, as it introduces counterparty risk.

The synthetic structure can allow a small positive spread over SONIA. However, that can work both ways and at times create a slight underperformance.

It is also worth saying that many investors deliberately avoid synthetic ETFs for historical reasons. After the financial crisis, regulators and commentators raised concerns about counterparty and collateral risks in swap‑based ETF structures, and there were some high‑profile warnings about synthetic ETFs as potential “black boxes” in a stress scenario. Although UCITS rules and market practice have improved protections since then, a lot of professionals prefer straightforward physical replication for core holdings, even if synthetics can offer slightly better tracking in normal markets.

masonic

The overnight rate compounds daily. Have you factored that in?

For comparison, GONS, another synthetic ETF has delivered 1.99% over 6 months, so it is not just CSH2.

artyboy

https://forums.moneysavingexpert.com/discussion/comment/82079964#Comment_82079964

Thanks, and that last point is what actually got me wondering, as Freetrade now includes OEICs, and I was considering switching my holding to RL to eliminate the counterparty risk aspect - that's when I noticed the slight difference in return. Not enough to bother me, but still curious.

https://forums.moneysavingexpert.com/discussion/comment/82080014#Comment_82080014

No, and good point, although my ciggie packet maths thinks the impact of compounding would only account for a smallish amount of the full spread versus SONIA

masonic

You could argue that any compounding would do no more than negate the fee, so there would still be some overperformance.

EthicsGradient

I get 1.88% for the last 6 months (22nd Jan to 23rd July) from the BoE SONIA compounded index here:

Data Series | Bank of England | Database

CSH2 is also described as "hedged". While I'd think that should mean that for a UK GBP investor, it ought to end up tracking SONIA as listed by the BoE, does that introduce another layer of complication for how the ETF is actually operated?

masonic

https://forums.moneysavingexpert.com/discussion/comment/82080069#Comment_82080069

It formally tracks eurozone short term MM rates and hedges back to sterling. However, Invesco's equivalent fund does not and has delivered equivalent performance over the last 6 months. Whereas Xtrackers has been slightly lower at 1.82% which is net of 0.05% semiannual fees.

artyboy

Well for what it's worth, I pulled the plug on CSH2 today (at least in Freetrade) and flipped over to RL. Was a bit of a faff because of their single trade limits, both buy and sell, but managed to get it done in about 10 mins.

Just for a laugh, I did ask ChatGPT (yeah, I know…) if there was a better defensive strategy to adopt if my view was that a major correction was coming in the near to mid term. Its view was a short dated gilt fund would be best because it would appreciate more in a crash due to likely lowering of interest rates, giving greater buying power for equities when I went back in.

However given it seems that interest rates are more likely to head up than down right now, I decided to ignore it!

masonic

Rather disappointing that it didn't consider stagflation. It probably would have told you to pile into gold...