Investors are focusing on their cash allocation amid uncertainty and lower interest rates
Cash management ETFs have had the most demand of any fixed income asset in 2025
Invesco’s Overnight Return Swap UCITS ETFs offer potential for enhanced returns
These products involve investment risks such as the use of derivatives for index tracking and synthetic ETF risk. For more information on risks please refer to the legal documents or click here.
In a climate where interest rates are low or falling, every basis point of performance can make a difference when it comes to your cash allocation. Invesco’s new range of Overnight Return Swap UCITS ETFs offer the potential for returns that may exceed those of money market benchmarks.
Sources: Federal Reserve (upper bound of the target range for federal funds rate), ECB (main refinancing operations rate) and Bank of England (Bank rate), as at 30 September 2025
Cash management funds have accounted for more than a third of all net new flows into fixed income ETFs this year. Around US$17 billion of assets has been gathered by these funds so far in 2025 more than three times the amount going into European government bonds and four times more than into US Treasuries.
These funds, however, are not all the same. The category encompasses a variety of funds, some holding short-dated bonds issued by governments, while others may hold corporate bonds, bank credit or traditional money market instruments. Because of their holdings, many of these funds introduce duration and/or credit risk into the portfolio.
Another option uses swaps to deliver passive returns of an index and potentially avoid many of the risks inherent with bonds. These innovative ETFs expand the choice available to investors, enabling them to choose a fund that most closely meets their risk and return objectives.
Invesco’s recently launched Overnight Return Swap UCITS ETFs aim to deliver the performance of currency-specific indices provided by Solactive, which are designed to reflect a daily-reinvested cash deposit at the relevant overnight interest rate. The funds use the same proven structure and operating model deployed across our market-leading swap-based ETF platform, which currently has over $80 billion of assets under management.
Swap-based ETFs achieve their investment objectives by holding a basket of equities or fixed income securities and simultaneously entering into swap contracts with banks. The two parties agree to swap cash flows – with the ETF delivering the return of the basket in exchange for the precise return of the index being tracked, usually minus a swap fee payable to the bank.
For illustrative purposes only
In this case, however, the ETF structure provides the counterparty banks with a means to finance their equity positions, reducing the banks’ balance sheet costs. This means the banks are willing to provide compelling swap economics to the ETF, which may result in an excess return above the benchmark.
Outperformance of the index will depend on the swap fee negotiated with the counterparty banks, and this could vary by fund. We’ll use the Invesco EUR Overnight Return Swap UCITS ETF as an example to illustrate what this might look like.
This ETF aims to provide the performance of the Solactive €STR Overnight Total Return Index, “less” the impact of fees. The following chart is an illustration based on simulated performance of an ETF with a positive 40 basis points swap fee, i.e., the ETF receiving the fee from the counterparty banks.
Past performance, real or simulated, does not predict future returns
Source: Invesco, as at 30 September 2025. The simulated performance of the Invesco ETF reflects the performance of the Solactive €STR Overnight Total Return Index plus 0.33% (0.43% swap fee minus the ETF’s 0.10% annual management fee).
The main risk with using swaps is that the counterparty is unable to fulfil its side of the contract. In this scenario, the ETF would be left holding the basket of securities, which may be worth more or less than the value of the index, depending on market movements. With over 15 years’ experience in structuring and managing swap-based ETFs, here’s how we are managing the risk:
The demand for fixed income ETFs has been growing strongly in the past five years due to the need for more targeted solutions but also with innovation and the availability of new exposures. Our new Overnight Return Swap UCITS ETFs are worth considering for investors who want to get more out of their cash allocation without increasing duration risk.
For any cash that exceeds what might be needed to cover immediate and very near-term liquidity requirements, investors may want to consider AAA CLO UCITS ETFs. These can be an effective complement to Overnight Return Swaps or other cash management tools, offering some of the most attractive yields among highly rated fixed income assets along with having very low duration. Find out more below in “Understanding CLOs: A guide to collateralised loan obligations”.
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