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I discovered recently that in the UK, money deposited in a cash ISA could be transferred to a stock ISA and vice versa. Of course the sum invested in cash + stock is constant (there is a yearly allowance from HMRC, as capital gains are untaxed).

So I was planing to put everything I could on cash ISA and play a few trades, typically buy some CAC ETFs a few days ago. But it appears that doing those moves usually take 30 days! This is a major inconvenience of course. My question is then, what could I buy that would approximately replicate a risk free rate like the ISA rate? Of course it has to be liquid so I can get rid of it if I find stock opportunities.

I wanted to buy risky European govies as I am OK with the default risk, but what I do not want is too much market risk.

Is there a better alternative?

  • Maybe I'm missing something but couldn't you open a stock ISA then leave uninvested funds in a cash or money market allocation? – quid Jul 1 '16 at 17:55
  • Hello, yes I should have said that the amount invested in the sum of cash + stock is constant. The pb here is that taking from one to the other is too long to catch opportunities – statquant Jul 1 '16 at 17:59
  • I don't mean in a separate account. In the US brokerage accounts include some form of cash allocation, either actual cash or a moneymarket. Inside the same account you have cash (or some very similar asset) and stock and other securities. What happens when you sell your stock in an ISA account? – quid Jul 1 '16 at 18:02
  • The problem is that the interest rate on cash in a stocks ISA is minimal, significantly worse than the rates on cash ISA. I think the interest also used to be taxed to encourage you to actually invest, but that may have changed now there's one ISA allowance for everything rather than an "extra" stocks ISA allowance. – Ganesh Sittampalam Jul 1 '16 at 18:33
  • @GaneshSittampalam I don't recall any tax issues while holding cash in a stocks ISA, however if you held a proportionately significant amount (i.e., a tradeable amount) of cash in a stocks ISA for any length of time, you would be issued with a warning from your ISA provider to either invest it or withdraw it. That happened to me once when ISAs were called PEPs – Nick R Jul 1 '16 at 18:40
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One possibility you may consider is to keep all of your funds in the stocks and shares ISA while investing that proportion you wish to keep in cash into a tradeable "Money Market" ETF.

A Money Market ETF will give you rates comparable to interest rates on cash and at the same time it will give you "instant access" subject to normal 3 day settlement of equities.

This is not exactly a perfect solution. Most Money Market ETFs will pay monthly dividends, so depending on your timing, you may have to give up some interest. In the worst case, if you were to sell the day before going ex-dividend, then you would be giving up a months interest. In the best case, if you were to sell on the day of going ex-dividend, you would be giving up no interest.

  • Ah, good one, I did not know this existed. So Say it is 15:00 in London, I want to buy say Vodafone in the close, I can sell this MM ETF and get the GBP straight away to buy it? – statquant Jul 1 '16 at 18:56
  • @statquant That would be the case with previous accounts at Barclays where you could trade cash pending settlement. However, my accounts with NatWest required that you wait for the 3 day settlement to transpire and the cash to hit your account before trading it. Barclays even gave me a discount on commission if I instantly retraded the cash. Best to speak to your ISA provider about their rules. – Nick R Jul 1 '16 at 18:59
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    @statquant Bond ETFs have very low fees so they track the basket of bonds they hold very accurately. The iShares GBP Corporate 1-5 Year ETF (Code IS15 - that's the letter "I" and the number "1") has a current yield of 2.72% and holds bonds with maturity dates ranging from 1 to 5 years. The iShares GBP Core Corporate Bond ETF (Code SLXX) has a current yield of 3.23% and an average maturity date of 13.82 years for the basket of bonds held. Bond holdings, such as these ETFs, carry interest rate risk - meaning that the price of bonds tends to decrease as interest rates rise (continue....) – Nick R Jul 1 '16 at 22:29
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    (... continued). In the current environment, there is little chance of an interest rate rise in the foreseeable future, so the risk is low. If you look at a chart for one of these ETFs, note how the interest is accrued between dividend payments and on the day the ETF goes ex-dividend, the price of the ETF drops by the corresponding dividend amount. Thus, selling out at any time should not mean looking interest. – Nick R Jul 1 '16 at 22:31
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    In addition to the two comments I have just posted, I should mention that these ETFs may prove to be of no benefit if you use them as very short term holdings. Don't buy them intending to hold them for only a week or two because the combination of commissions and the bid/offer spread will mean you will likely take a small loss if held for very short periods. If you want to put your money away for a couple of months or more, then in the current interest rate environment you should be OK. At current yield, holding an ETF for 2 months in return for 0.3-0.4% net may not be worth the risk. – Nick R Jul 1 '16 at 22:48

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