Be it StashAway, Endowus or Syfe, it’s doesn’t deviate too far from using Money Market fund and short-term bond fund to give an interest rate that is higher than bank deposit rate and here we are comparing to the interest rate offered by the 3 strongest banks in Asia with superior credit rating.
The only way for the Robo Advisors to produce higher yield is by investing into funds that has sovereign or corporate bonds with a lower credit rating (e.g Single A or triple B some even goes below triple B i.e speculative bonds) or going into short term bond funds e.g average maturity at 2 yes or below). Most probably they will not invest into investment grade Money Market funds only as it’s average yield for sgd is unlikely to go above 1%.
In short, the lower the average credit rating and the higher proportion of short-term bond funds in the holdings, the higher it’s expected yield- nothing magical and yes nothing is guaranteed including default in selected bonds or interest rate spike resulting in falling prices for the bonds. In extreme case, interest rates might even fall into negative hence the money market fund might find difficulty placing deposit with financial institutions resulting in lower overall yield.
When you are jumping from a lower yield product to a higher yield product, you are basically moving up the risk-reward spectrum - as the saying goes higher risk = higher return & no free lunch in this world. This is especially true for money market and bond funds/ etfs, assuming equal cost paid (kudos to robots for giving 100% trailing fees rebate). Nonetheless, make sure that u do your due diligence in understanding what is in the underlying basket before putting your money into it.
In fact one may even design his own “cash” fund using money market and bond etfs to achieve similar results.. though currently these is no ultra short term sgd bond etf listed on sgx. the closest would be MBH by NikkoAM that has a medium term bond duration.
