Definition
Overnight ETF
An overnight ETF invests almost entirely in overnight instruments maturing the next business day, offering very low risk and money-market returns in an exchange-traded wrapper.
Closely related to the liquid ETF, an overnight ETF holds instruments with one-day maturity such as tri-party repo, minimising both interest-rate and credit risk. Indian investors and trading desks use it as an ultra-safe place to park cash that may be needed at short notice.
Returns broadly track the overnight rate and are lower than longer-duration debt funds, the trade-off for near-zero volatility. Like liquid ETFs, overnight ETF units can serve as a cash-equivalent and may be accepted as collateral, making them a practical cash-management tool for active traders.
Related terms
- Margin (Trading)Margin is the collateral a trader must deposit to cover potential losses on a position, comprising components such as SPAN, exposure and mark-to-market margin in the Indian derivatives market.
- Liquid ETFA liquid ETF is an exchange-traded fund that invests in very short-term money-market and overnight instruments, used by traders to park idle cash and even as collateral or margin.
- Bond ETFA bond ETF is an exchange-traded fund that holds a portfolio of fixed-income securities, such as government or corporate bonds, tracking a bond index and trading on the exchange like a stock.
- Cash DragCash drag is the small performance shortfall an index fund or ETF suffers from holding uninvested cash, which earns less than the index when markets rise and contributes to tracking error.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.