Some fans of this site own dividend-paying stocks for income and growth. We do too!
Other fans of our site own low-cost Exchange Traded Funds (ETFs) to passively ride market returns. Yes, we do too!
But there are many other ways to invest…including the use of a high-interest ETF for some cash buffer against bonds and equities as asset classes.
Should you invest in a high-interest ETF?
Read on to find out our take as this space emerges!
What is a high-interest ETF?
We recently read that our federal banking watchdog has launched a review of cash exchange-traded funds (ETFs), a newish investment product that is gaining more momentum over time – given our current era of modest interest rates. The Office of the Superintendent of Financial Institutions (OSFI for short), which regulates banks, recently launched its review of such ETFs and any liquidity concerns they could create.
We’re going to continue to watch this space including OSFI very closely.
The way we see it (along with a few fund providers below), cash / high-interest ETFs are hybrid products that offer distributions/interest like any interest savings account would but they could be better – they can offer even better interest rates.
Recall an ETF is a security listed on a stock exchange like the Toronto Stock Exchange (TSX). Rather than representing ownership of any one company’s equity or debt, an ETF is often a basket of stocks or bonds or both. We’ve offered up a few posts on our site, regarding some of our favourite ETFs to own and why. We’ll provide links below at the end of this post.
Not every ETF is “passive”. Any passive ETF is not concerned with beating the market – rather being the market. For example, an ETF that tracks the entire TSX index would own all of the stocks in the S&P/TSX Composite Index, as opposed to the fund manager picking stocks that he/she believes will outperform the index.
Cash ETFs are very different and not that “passive”.
A high-interest savings ETF is like a savings account that trades on the stock market. The bank(s) pay interest to the ETF, which pays out this interest income to its unit owners.
Cash ETFs are hybrid funds that function like high-interest savings accounts, yet offer much better interest rates, but unlike any guaranteed investment certificates (GICs), investors can consider liquidating their position in the fund, at any time, just like draining their bank account(s).
As we understand it:
“Cash ETFs are able to pay high(er) interest rates because select banks offer them access to wholesale funding – that is, the banks pay the funds premium interest rates they would normally reserve for institutional clients, or for large orders. Similar rates would be available to wealthy retail investors who wanted to deposit millions of dollars.”
Source: Globe and Mail.
This access to wholesale funding has therefore caused a bit of a stir with some banks, so much so, some banks don’t offer these ETFs to their clients! Doing so, would be robbing themselves of some juicy margins.
We’re not sure if the OSFI will or will not kick up a fuss with cash ETFs, but for now, they remain on the market as-is.
What are the advantages of high-interest ETFs?
We see a few:
- Decent interest rates. If you want to earn some interest, more than most high-interest savings accounts provided by many institutions, then these are seemingly good options.
- High liquidity. Much like some of our favourite ETFs, or dividend stocks for that matter, you can buy or sell your cash ETF on a moment’s notice on the TSX during market/trading hours.
- No minimum balance. By some or buy a lot! Like most ETFs you don’t need to worry about front-end or back-end charges or a defined balance.
What are some of the disadvantages of high-interest ETFs?
Well, a few things to consider:
- What might happen with any OSFI investigation? As always with any investment selection or product, the financial future is very cloudy long-term. Regulations can and do change depending on newly marketed products. Worse case, we believe, these products could be capped for interest payments to unit owners. Canada’s banks are heavily regulated, for good reason. We want that as consumers and investors. Canadian banks have strict limits on how they fund their loans. The 2008-09 global financial crisis triggered more changes, in a good way overall.
- High-interest ETFs are not CDIC-eligible. You might have read this post on our site:
We like high-interest savings accounts (not ETFs) for a simple reason – liquidity and CDIC insurance.
Financial institutions that are members of the Canada Deposit Insurance Corporation (CDIC) insure savings of up to $100,000, while credit unions are insured provincially and usually cover the full deposit, with no limits. Money that is deposited in a savings account generates interest by allowing the bank to access those funds to loan to others. Unlike your cash savings, Cash ETFs are not eligible for CDIC insurance.
- Don’t forget ETFs have money management fees. The dawn of commission-free investing offers at least a partial solution – depending on your brokerage – there might not be any trading commissions (e.g., $9.95 or less) to buy your cash ETFs. But, fees don’t end there. Any company that offers the high-interest ETF is going to charge you a money management fee. Some are low, some are higher, as always in personal finance and investing “it depends”. So, depending on how much you have to invest, this fee may or may not be worth it. We would advise any/all investors to keep any money management fees to a minimum.
- All the risk but little to gain? In our Bonds vs. GICs post, we told you this and we still feel that way:
“…This makes bonds helpful, generally speaking in our opinion when the markets tank to hold on and/or for rebalancing. That’s about it.”
If you need the security of cash, i.e., money when you need it, go with a higher-interest savings account or GICs. If you do some shopping, you’ll find you can earn close in a GIC product as you can in the high-interest savings ETF.
A reminder that with any interest savings account and especially the GIC, your principal is insured and you won’t be hit with trading commissions.
It will be interesting to see what the OSFI concludes with any investigation and review.
Should you invest in a high-interest ETF?
Totally up to you of course but at Cashflows & Portfolios we’re looking into it 🙂
We feel with commission-free investing, some of the benefits outweigh any risks.
Although cash ETFs have been sold in Canada for some years now, their popularity is on the rise – now that interest rates are meaningful for the first time in almost a decade.
Here are some of the more popular choices to date (information current to the time of this post) when it comes to your decision: to invest in a high-interest ETF.
Fund 2 3 with monthly distributions unless noted:
- Horizons High-Interest Savings ETF (CASH)
- MER = 0.13%
- 4.95% Yield 1
- Purpose High-Interest Savings ETF (PSA)* *Also available in F-series and A-series funds
- MER = 0.17%
- 4.83% Yield 1
- Ninepoint High-Interest Savings ETF (NSAV.NE)* *Also available in F-series and A-series funds
- MER = 0.16%
- 4.96% Yield 1
- CI High-Interest Savings ETF (CSAV)
- MER = 0.16%
- 4.98% Yield 1
- Evolve High-Interest Savings Account ETF (HISA.NE)
- MER = 0.17%
- 4.99% Yield 1
Notes:
1 – Current to time of this post; including references from each provider. Yield is subject to slight fluctuation and change.
2 – Funds are RRSP eligible, although you may decide to invest in these funds in other accounts. See specific fund eligibility for details.
3 – Depending on the fund, investments could be in one or more Canadian banks. Please read any fund prospectus carefully before investing.
Should you invest in a high-interest ETF summary
Bonds vs. GICs – which is better and when?
Check out some of our favourite low-cost and diversified ETFs for your RRSP.
You should consider using some form of Cash Wedge as you plan for semi-retirement or retirement.
Need some support? We’re here to help!
Knowing how to demystify the retirement income puzzle, using cash ETFs or not, is not trivial work but it’s absolutely something we can help with. If you need some help solving your retirement decumulation puzzle (i.e., how to efficiently withdraw from your retirement accounts), or figuring out if you have enough saved to spend for your retirement income plans, we’re here to help answer those questions and more!
If you are interested in obtaining private projections for your financial scenario, please contact us here to get started.
Thanks for your ongoing readership and for sharing this site with others.
Mark and Joe.
cant see the whole article because google ad box covering a third of the screen
Thanks very much, we will edit – not sure what is up!
Appreciated.
CAP
Unfortunately my broker doesn’t not allow me to buy theses funds; I have to buy their ‘in house’ HISA fund.
Indeed, Jackson. There are a few brokerges that won’t bother that we know of! It will be interesting to see how OSFI rules anything over time, if at all?
CAP
I’m planning to buy some HSAV: https://horizonsetfs.com/ETF/hsav/
Pays 5% but does not disburse cash in dividends (or interest like a HISA), it’s just capital gains once you sell it. I prefer that for my needs.
We noticed that one too, Mike! (HSAV). We considered it on our list but the nuance of capital gains focus might only appeal to some investors but we fully appreciate the tax-efficiency. Not unlike their other swap-based funds like HXT, HXS, etc.
You must be investing a lot in your taxable and/or corporation? Smart.
CAP
I buy the CASH.TO ETF via Questrade. I just use it as a temporary holding place for dividends until I’m ready to pull the money out. Questrade charge a commission fee when selling ETFs, so I ensure it’ll be worth doing before buying i.e. the anticipated interest earned will exceed the fee by a comfortable margin.
We recall Questrade is free to buy (commission-free ETFs) but not sell ETFs – right? Still $4.95 per transaction to sell?
As long as you are not doing that (selling) too often, we see no issue of course with that CASH ETF. Seems wise to us depending on your holding period. Likely to do something similar moving forward with a few thousand in cash inside the RRSP or TFSA.
CAP
Mark, you mention that you don’t include your TFSA dividends in your numbers, in part because you won’t be drawing from your TFSA for many years. Our plan is similar, in that we won’t be drawing from the TFSAs, however I do include the dividends received in our dividend income/spending amount – I just withdraw the TFSA dividend amount from a RRIF or non-registered account instead, and invest the actual dividends in the TFSA. It’s a little mental trick that helps me sell stock/ETFs, in that I’m not really selling equity, I’m just transferring my dividends to a different account for withdrawing – I find it really does help me let go of some equity; not easy to do after being focused for years on accumulating it.
Totally fair, Bob. I don’t report all dividend, all assets for privacy reasons as well. Just too many people (sadly) that have created some fraud accounts or tried to hack. Unfortunate but the reality is I need to be safe.
On a more personal note, planning note, yes; TFSAs are likely going to be the last account to be withdrawn from.
Interesting little mental trick, to force yourself to spend some of your hard-earned money 🙂
All our best,
CAP