The ETF world has a few options for investors who are parking cash and want to squeeze at least a modest return out of this money.
By now, most investors have discovered the benefits of investment savings accounts for holding their cash. These accounts are traded like mutual funds and offer interest rates around 0.75 per cent. Typically, they're quite safe because they're eligible for coverage by the Canada Deposit Insurance Corp.
The ETFs alternatives for holding cash were highlighted in a recent note on ETF model portfolios from National Bank Financial. NBF says that while these ETFs are not strictly the same as cash, they are cash-like in that they:
- Are very liquid: They can be sold any time through the trading day with no early redemption penalties.
- Offer a decent yield: Should be competitive with cash deposits.
- Have limited duration risk: A low duration means you face little to no chance of your fund falling in value if interest rates rise.
- Have strong underlying assets: The ETFs selected hold highly rated investment-grade instruments.
The first ETF alternative to investment savings accounts is the $555.5-million Purpose High Interest Savings ETF (PSA), which simply holds deposit accounts at banks and credit unions. The management expense ratio is 0.11 per cent, which leaves a yield of about 1 per cent. As an investment fund, this product is not covered by CDIC.
Another ETF option for holding cash is the $83.5-million BMO Ultra Short-Term Bond ETF (ZST), which holds bonds and similar instruments maturing in less than one year. The after-fee yield to maturity here is about 1.3 per cent, and the weighted average duration is 0.6 years. This means that if interest rates went up one percentage point, this ETF would fall 0.6 of a point.
One more ETF cash option is the $107.5-million iShares Premium Money Market ETF (CMR), which holds bonds and commercial paper and offers an after-fee yield to maturity of about 0.55 per cent. The duration is 0.16 years, which is minimal.
The drawback with using ETFs for your portfolio cash is the cost of trading. Most brokers charge just less than $10 to buy and sell stocks and ETFs, which is enough to offset any yield advantages you get with these products unless you're trading substantial amounts. Both Scotia iTrade and Qtrade Investor include CMR among the ETFs they offer commission-free. You can buy all three ETF cash options at no cost through Questrade and Virtual Brokers, but you'll pay the usual commission to sell. National Bank Financial offers free trading of all TSX-listed ETFs if you buy or sell 100-plus shares.