Due to geopolitical uncertainties and expectations of a recession, there is heightened volatility in the markets today. Investors may not want to invest all or part of their money. However, in a high interest rate environment, keeping idle cash can cost us.
We can easily put our money in risk-free investments such as T-bills or bank fixed deposits to earn an interest return of close to 4% today. However, since our funds will be locked for period of time, this defeats the purpose of keeping a cash warchest. We want to invest when opportunities in the market arise.
It can also grow very tiresome to continuously pull our funds in and out of our brokerage account. Furthermore, if we are monitoring popular stock markets, such as the US and Hong Kong, we will also have to incur foreign exchange costs each time we want to invest.
Some brokerage accounts currently offer a cash management account to overcome this challenge. At least five Singapore brokerages currently offer their own cash management accounts – FSMOne, Poems, Syfe Trade, Tiger Brokers, and moomoo Singapore. However, there is still varying levels of investment risk depending on the exact cash management account.
Interactive Brokers (IBKR) Pays Up To 4.33% On Cash Balances
To help investors bypass the problems highlighted above, Interactive Brokers pays investors up to 4.33% on our US Dollar cash balances. This can be quite competitive, especially when compared with what we can realistically earn on other risk-free investments that we can make.
Beyond having to hold US Dollars, we can earn an interest return in other currencies, including Singapore Dollars, Hong Kong Dollars, Euros, Australian Dollars, and more.
To summarise, this means that:
1) We do not have to invest in any products (and hold any level of risk, no matter how small)
2) We do not have to constantly make foreign exchange conversion (and incur unnecessary costs)
3) We do not have to constantly pull our money in and out of our brokerage account (to earn a decent interest return)
4) We can immediately invest our money when we spot an investment opportunity in the markets (without any lag time, no matter how small)
However, there are some caveats to earning this interest rate on IBKR that we need to understand.
#1 We Only Earn Interest On Funds Beyond The First US$10,000
We do not earn any interest rates on our first US$10,000. We only earn a return on sums that are above US$10,000. This means we may need to have a substantial amount of funds in our IBKR before the interest returns look attractive on our entire balances.
Source: All screengrabs are from IBKR
This is similar for sums that we keep in other currencies as well. As we can see, US$10,000 will roughly translate to HK$78,000 and SG$14,000.
#2 We Need To Invest US$100,000 With IBKR To Earn The Full 4.33% Interest Rate
We only earn the full headline 4.33% if our net asset value (NAV) with IBKR is US$100,000 and above. If we have less than US$100,000 then we will earn “proportionally” less, according to IBKR.
For example, if we have US$20,000 in cash, and the remaining US$80,000 invested, then the screengrab below will apply to us. As we can see, our first US$10,000 in cash will not earn any interest. Our next US$10,000 in cash earns the full 4.33% interest rate. Our “blended rate” is only 2.165%.
If we do not have US$100,000 in NAV with IBKR, then the interest rate that we earn will drop proportionally. For example, in the screengrab below, if we only have US$50,000 in NAV (half the required US$100,000 to earn the full interest), then we will only earn half the interest rate – at 2.16% – on any amounts above the first US$10,000.
We can use its calculator feature to estimate the interest rates that will get on our cash balances.
#3 We Earn Varying Interest Rates On Funds Kept In Other Currencies
The headline 4.33% interest rate is only for our balances in US Dollars. While we also earn an interest return on balances in other popular currencies, it is likely lower than the headline rate.
As we can see in the screengrabs below for our Hong Kong Dollar and Singapore Dollar balances, the rates can be over 1.5% lower (or more).
On the Interactive Brokers website, we can also see the full list of current benchmark rate for each currencies.
We’ve referenced the US Dollar, HK Dollar and Singapore Dollar, used in earlier examples, to highlight that the benchmark interest rates can be different.
#4 The 4.33% Headline Rate Is Subject To Change
There reference benchmark rates for US Dollars and other currencies are also subject to change. On the IBKR website, it states that it “uses a combination of internationally recognized reference rates (such as Fed Funds), bank deposit rates, and dynamic interbank rates determined from foreign exchange and money markets to calculate an IBKR Reference Benchmark rate”.
Invest With Interactive Brokers (IBKR)
Besides being one of the only few stock brokerages that will pay us an interest return on our idle cash, IBKR also offers very competitive brokerage commissions, access to over 150 markets, and comprehensive investing solutions.
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