Is Now a Good Time to Buy a High Interest Savings ETF?

With interest rates and inflation soaring, bonds sinking and the volatile stock market, many investors are looking to high-interest exchange-traded funds, or ETFs, as a place to store some cash.

“It’s one of the few places to hide and, in fact, it’s arguably superior to bonds,” says Daniel Strauss, ETF research and strategy director at National Bank of Finance in Toronto.

Bonds are usually a weighty in the portfolio to help cushion the impact of a stock market slump, Strauss says, but they aren’t playing that part effectively at the moment given the “painful” drop so far this year. Many investors turn to cash and cash alternatives instead, but there are pros and cons to consider.

Mr. Strauss says there are six Canadian ETFs that pursue a high-interest savings strategy. They are: Horizons Cash Maximizer ETF (HSAV-T), Horizons High Interest Savings ETF (CASH-T), CI High Interest Savings ETF (CSAV-T); High-Purpose Interest Savings Fund (PSA-T); Evolve High Interest Savings Accounts Fund (HISA-NEO); and Ninepoint’s High Interest Provident Fund ETF Series (NSAV-NE). Combined, these ETFs have approximately $6.6 billion in assets under management.

The current total return before fees on these investments is around 1.45 percent. They primarily invest in higher interest savings accounts and deposits offered by major Canadian banks. Their management expense ratios vary from 0.05 percent to 0.39 percent.

Earlier this month, Evolve ETFs cut fees on the HISA ETF to 0.05 percent – down from 0.15 percent – for the rest of 2022.

Raj Lala, president and CEO of Evolve ETFs, says market volatility has been a major challenge for advisors and their clients.

“I thought it would be a good service point and build some goodwill with the consultants if we could give them a slightly higher return by lowering our fees,” he says. “I know 10 basis points doesn’t sound like a lot, but when you’re talking about returns in the 1.45 percent range, 10 basis points is relevant.”

Mr. Strauss expects some other high-interest ETF providers to follow Evolve’s lead and lower fees.

“If it encourages investors’ behavior of choice [Evolve’s] product, you are almost certain to see competing ETFs follow suit,” he adds.

With one-year Guaranteed Investment Certificate (GIC) rates ranging from 1 percent to 3.35 percent in Canadian banks and credit unions, high-interest ETFs have some competition out there.

The benefit of high-interest ETFs, says Mr. Lala, is that they are a liquid investment and not a locked-in like GIC, and there are no penalties for withdrawals.

“You can be very smart if you want to take advantage of any opportunity [in the stock market] Or if you need the cash quickly,” he explains.

Evolve has seen more demand for the HISA ETF, but funds are flowing in and out of the ETF regularly; Mr. Lala notes that someone may be looking for a safe haven for their money amid market volatility while another person investing in the fund sees an opportunity in the stock market and takes the money.

“I don’t think there is a better return for the liquidity option available in the market,” he adds.

Craig Ellis, vice president and portfolio manager at Bellwether Investment Management, says the “clear supporter” of this type of investment is that it’s geared towards higher short-term interest rates.

“With the Bank of Canada continuing to raise short-term rates through this year, the yield should improve every time the bank moves higher assuming charter banks follow suit — there is no reason why they cannot,” he explains.

These products are geared towards those with short-term liquidity needs – and are not intended to be a long-term investment – so you are not limited to a specific term.

“This is obviously a positive,” says Mr. Ellis, adding that it’s especially handy if you already have a debit brokerage account.

“For people who want to hold some cash in this market as part of a defensive strategy, it’s definitely a good place to do that,” he says. “And if they make the decision to start investing in other securities, it will be very easy to sell them and then they can just buy stocks or fixed income securities there in the same account.”

Ellis says investors should shop around however, as a one-year GIC or some higher-interest bank savings account may provide a higher return if you have the flexibility to lock in your money for a year or more.

Mr. Strauss adds that there are some drawbacks to consider with these investments.

Investors looking at these products need to keep in mind that as an ETF, entry and exit will incur trading costs, which are not covered by Canada Deposit Insurance Corp. However, it offers diversification to the issuer since the ETF is likely to invest with many banks, so the risk of default is very low. There are also taxes to be paid on income if the investment is kept outside a registered account.

Another factor to consider, Mr. Strauss says, is if interest rates do not go up as expected and instead go down, the rate of return on these ETFs will go down.

“People thought higher rates were a sure thing, every year in the 10 years after the financial crisis,” he notes, but that hasn’t happened.

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