I have never invested in a cash-only ETF, but I definitely have invested in a cash-only traditional mutual fund, which is called money market fund.
Such funds make a lot of sense. At least in Europe, there are systems for supposedly ensuring that if you deposit money to a bank, and the bank goes bankrupt, that as a creditor of the bank, your assets are guaranteed to be paid back to you up to a certain limit (100 000 EUR or so). However, these systems do not have the money to pay back to all creditors, if a large bank fails. They can only pay back to all creditors if a very small bank fails. So, strictly speaking, your deposits are not guaranteed because the mechanism to guarantee them is not funded well enough.
Not only that, but some people have more than 100 000 EUR of cash, so if you believe in the government funding the "up to 100 000 EUR" guarantees by raising taxes or just printing new money, that won't help you.
You can deposit the money to a checking account, but such accounts yield only very minimal interest because the depositor can withdraw the money anytime, and the bank has to take into account this risk.
You can do a time deposit / term deposit for 3 or 6 months or so, but only large deposits yield good interest, and as an investor, you should diversify (i.e. one deposit should be small). And, time deposits do not have a secondary market, so you are at the mercy of the bank if you want to cancel your deposit. So, this doesn't make sense.
A money market fund invests into certificates of deposit (and perhaps some percentage into term deposits), which can be only invested to in large amounts. Certificates of deposit have a working secondary market, so the money market fund can get rid of the investments quickly, should the investors want back their money immediately. So, the deposit is not cancelled by a withdrawal; instead, it is sold to some other investor.
So, the advantages are:
- You get good interest, and fees are often low due to the simplicity of the mutual funds
- You get the ability to withdraw the money anytime you want
- You get good diversification
- You get indirect access to secondary market for certificates of deposit without having to invest a lot of money
It's a very good way to manage your cash to invest into a money market fund. In some market conditions where long interest rates are abnormally low, it may make sense to replace the bond part of your portfolio by money market funds.
Now, what to avoid?
- Avoid funds having long duration (i.e. interest rate fixed for 5 years), as those can fall in value if the interest rate rises
- Avoid funds having long maturity (i.e. loans given for 5 years or so), because those have a high risk of the investment target going bankrupt -- you can forecast for 3 months whether some bank goes bankrupt or not, but you can't forecast for 5 years as easily. Sometimes, the duration is short but maturity is long (variable rate instruments). Then, you don't see the risk in normal market conditions, but the risk WILL be realized in abysmal market conditions.
- Avoid funds investing in commercial papers. Only pick true money market funds that invest in very short-duration government bonds, or to certificates of deposit or term deposits of banks.
- Avoid funds having high fees. Where I live, over 0.3% of fees should be avoided.
- Avoid investing into money market funds in conditions where interest rates are negative. Where I live, interest rates are currently negative so I store my emergency buffer in my checking account currently. As a small investor, the interest rate of my checking account is 0% instead of being negative.