High interest rates are hard on the housing market, but great for people trying to save a down payment.
Rates on the safe savings vehicles appropriate for home down payments are at the highest level in decades. With virtually zero risk, you can earn 3 to 5 per cent.
Both stocks and bonds have moved higher in 2023, a contrast to the trash returns last year. Don’t be tempted to put your home down payment into the markets, though. While there’s potential for outsize returns, you could also lose money.
Here’s a home-saving strategy that costs nearly nothing and allows your money to grow at a nearly risk-free rate of 4.85 per cent. That’s better than those completely risk-free savings accounts covered by deposit insurance, where rates top out in the 3 to 3.75 per cent range.
To start, open an account with a no-cost stock trading app like Wealthsimple or TD Easy Trade, ideally using a tax-free savings account to avoid paying tax on your interest income. The new Tax-Free First Home Savings Account, likely to go live in April, will be a great option, too.
Your savings will go into high interest savings account exchange-traded funds, also known as cash-equivalent ETFs. These funds keep the money invested by clients in accounts at big banks. The money in HISA ETFs is not protected by deposit insurance, but the bank accounts used can be considered quite safe.
The interest rate on HISA ETFs is typically about 4.85 per cent right now after fees, which you can track by checking a fund’s management expense ratio. MERs for this type of ETF tend to be in the area of 0.15 per cent.
ETFs trade like stocks, which means a lot of brokers charge a commission of $5 to $10 per buy or sell. But Wealthsimple charges zero to trade, and TD Easy Trade gives you 50 free trades a year. This means you can buy HISA ETFs on a regular basis at no cost.
For example you could add money to your trading app and buy some ETFs every time you get paid. If you have some money left at the end of the week, you could buy some more. When it’s time to buy your home, you’d sell your holdings and transfer the cash to your chequing account.
The interest rate on HISA ETFs follows the Bank of Canada’s overnight rate, which is expected to stay put for a while after a big run-up last year. The next move is most likely down, but that’s not expected to happen until late this year or early next.
The next 11 to 12 months offer an opportunity for homebuyers savers to earn interest on their savings at a rate close to 5 per cent, with vastly less risk than stocks offer. If you plan to buy a house, get on it.
Finally, a quick list of HISA ETFs:
- CI High Interest Savings ETF (CSAV-T)
- Evolve High Interest Savings Account Fund (HISA-NE)
- Horizons High Interest Savings ETF (CASH-T)
- Ninepoint High Interest Savings Fund ETF (NSAV-NE)
- Purpose High Interest Savings ETF (PSA-T)
-- Rob Carrick, personal finance columnist
This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.
The Rundown
Your retirement plan needs these three stocks
The primary rule for retirement plans is to conserve assets. Whether you use an RRSP or a TFSA for your savings, it’s essential to protect your principal. Growth is important, of course, but if you suffer heavy losses you may never recover them. Gordon Pape profiles three dividend-paying securities to get you started. He’d be astonished if they are not more expensive in five years than you’d pay now.
The new shareholder friendly energy company: Big on dividends, forget renewables
BP PLC’s share price rallied this week after the British-based energy giant released its quarterly financial results, but the gains had little to do with gargantuan profits or a big dividend hike. Instead, it appeared largely tied to the company’s updated commitment toward slashing its oil and gas production by 2030: With profits booming from robust fossil fuel prices, there’s now going to be significantly less slashing in the coming years. As David Berman tells us, It’s a pivot that other producers are likely noting as surging profits from oil and gas lead to a fresh appreciation of traditional energy assets.
Swimming against Brookfield’s tide of positivity
Everyone, it seems, loves Brookfield’s sprawling investment empire and last week demonstrated some of the reasons why. On Wednesday, Brookfield Asset Management Ltd., the pure-play alternative-asset manager that was spun out of parent Brookfield Corp. in December, delivered its first earnings report. It said it raised US$93-billion in capital in 2022, a record for the Brookfield group. A day later, Bruce Flatt, chief executive of Brookfield Corp., reiterated his commitment to continue delivering compound annual returns of 15 per cent a year or better. Meanwhile, ten out of 12 analysts rate Brookfield Corp. as a buy. Only a curmudgeon would swim against this torrent of positivity. So, on behalf of curmudgeons everywhere, Ian McGugan steps forward and attempts to do just that.
The high-yield, but defensive ETFs that Canadians can’t get enough of: Covered-call funds
Choppy markets have supercharged Canadians’ hunger for defensive, yet high-yield investments, and lately many are piling into a subset of exchange-traded funds that fit this bill – some with payouts around 13 per cent annually. Covered-call funds have existed for some time, yet investor interest in them has soared over the past year. Tim Kiladze tells us more about them, including their drawbacks.
Tracking high-yield stocks over 46 years
The Canadian stock market as a whole was bested again by high-yield stocks in 2022. But that shouldn’t be a surprise, because stocks with high yields have outperformed in 28 of the past 46 years – often by a substantial margin. Norman Rothery has the details.
Last year’s laggards lead U.S. stocks’ 2023 rebound, for now
U.S. stocks that took a beating last year are surging in the early weeks of 2023, leading markets higher. Some investors believe that trend is unlikely to last, especially if markets continue recalibrating expectations for how high the Federal Reserve will need to raise rates this year to keep cooling off inflation.
Others (for subscribers)
The highest-yielding stocks on the TSX, plus risk data
The most oversold and overbought stocks on the TSX
Monday’s analyst upgrades and downgrades
Globe Advisor
How to manage RRIF withdrawals tax-efficiently to avoid ‘a hefty penalty’
Are you a financial advisor? Register for Globe Advisor (www.globeadvisor.com) for free daily and weekly newsletters, in-depth industry coverage and analysis, and access to ProStation - a powerful tool to help you manage your clients’’ portfolios.
Ask Globe Investor
Question: I am 63 years old and plan to retire in a few years. My portfolio is invested 90 per cent in equities and 10 per cent in guaranteed investment certificates. Is it time to go more conservative, such as a 60/40 mix of stocks and GICs?
Answer: There is no one-size-fits-all solution when deciding on an optimal asset allocation. The answer depends on many factors, including your age, risk tolerance, spending plans in retirement, net worth and how much income you expect from government and company pensions.
If you will be retiring with an inflation-indexed defined-benefit pension plan that will cover most of your living expenses, for example, maintaining an aggressive asset mix may be appropriate. I know seniors who are comfortable investing most, if not all, of their portfolio in stocks. Typically, they are experienced, relatively affluent investors who would have no financial worries even if the market were to go into the tank for several years.
The kinds of stocks you own are also a consideration. A portfolio of dividend-paying utilities, banks and consumer staples companies is going to be more stable than one stuffed with tech stocks and speculative investments.
On the other hand, if you don’t have a DB pension and will be drawing down your portfolio to pay for living expenses, it may be prudent to switch to a more conservative mix of stocks and fixed income. You don’t want to have to cash in stocks in the middle of a bear market to pay your grocery bills.
You should also keep in mind, however, that you could easily live for another decade – or two or three – after you retire. For someone who is 65 today, the average life expectancy for men is nearly 82 years, and for women it’s nearly 86, according to Statistics Canada. That’s a long time for the stocks in your portfolio to appreciate and for their dividends to grow, so playing it too safe could have negative consequences – not just for you, but also for your heirs. GICs are predictable, but they don’t provide capital or income growth, and the interest is taxed at higher rates than dividend income.
As you get closer to retirement, you may wish to meet with a fee-only financial planner who can run some financial projections based on different market scenarios and asset allocations. A good planner can help you find your personal “sweet spot” where your mix of stocks and GICs or bonds lets you enjoy your retirement without worrying that you’re being too aggressive, or not aggressive enough. That equilibrium point will be different for everyone.
--John Heinzl (E-mail your questions to jheinzl@globeandmail.com)
What’s up in the days ahead
The Contra Guys take a long-distance journey to Brazil for their next stock pick. Plus, Gordon Pape will review his model RRSP portfolio, which continues to outperform his target.
Click here to see the Globe Investor earnings and economic news calendar.
We want to hear from you
The Globe is looking for young Canadians to take part in our Paycheque Profile series, a non-judgemental look at how young workers are spending, saving, allocating and investing their money. To see if you are a good fit for taking part in a profile, please email Globe personal finance editor Roma Luciw at rluciw@globeandmail.com Here are a few recent examples of profiles:
· 26-year-old film worker earns $73,000, but worries about his future
· Calgary engineer, 32, aims to pay down a $150,000 loan debt, money that he used to invest
Compiled by Globe Investor Staff
Rob Carrick