Skip to main content

With rising interest rates and inflation, sinking bonds and a skittish stock market, many investors are looking to high-interest saving exchange-traded funds, or ETFs, as a place to stash some cash.

“They’re one of the few places to hide, and in fact, arguably superior to bonds,” says Daniel Straus, director of ETF research and strategy with National Bank Financial in Toronto.

Bonds are usually a ballast in a portfolio to help ease the effect of a declining stock market, but aren’t playing that part effectively right now given the “painful” decline so far this year, Mr. Straus says. Many investors are turning to cash and cash alternatives instead, but there are pros and cons to consider.

There are six Canadian ETFs that follow the high-interest savings strategy, says Mr. Straus. They are: the Horizons Cash Maximizer ETF (HSAV-T), the Horizons High Interest Savings ETF (CASH-T), the CI High Interest Savings ETF (CSAV-T); the Purpose High Interest Savings ETF (PSA-T); the Evolve High Interest Savings Account Fund (HISA-NEO); and the Ninepoint High Interest Savings Fund ETF Series (NSAV-NE). Combined, these ETFs have about $6.6-billion of assets under management.

The current gross yield before fees on these investments is about 1.45 per cent. They mainly invest in high-interest savings accounts and deposits offered by top Canadian banks. Their management expense ratios vary from as low as 0.05 per cent to as high as 0.39 per cent.

Earlier this month, Evolve ETFs cut the fee on its HISA ETF to 0.05 per cent – down from 0.15 per cent – for the rest of 2022.

Raj Lala, president and chief executive officer of Evolve ETFs, says the market volatility has been a major challenge for advisers and their clients.

“I thought it would be a good service point and build some goodwill with advisers if we were able to give them a little higher yield by decreasing our fee,” he says. “I know 10 basis points doesn’t sound like a lot, but when you’re talking about yields in the 1.45-per-cent range, then 10 basis points is relevant.”

Mr. Straus expects some other high-interest ETF providers to potentially follow Evolve’s example and cut fees.

“If it does promote investor behaviour to choose [Evolve’s] product, you’ll almost certainly see the competing ETFs follow suit,” he adds.

With one-year guaranteed investment certificate (GIC) rates ranging from 1 per cent to 3.35 per cent at Canadian banks and credit unions, high-interest saving ETFs have some competition out there.

Mr. Lala says the benefit of a high-interest savings ETF is that it is a liquid investment and not locked in like a GIC, and there are no penalties for withdrawals.

“You can be very nimble 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 its HISA ETF, but funds flow in and out of the ETF regularly; one person may be looking for a safe harbour for their cash amid the market volatility while another person invested in the fund sees an opportunity in the stock market and is taking cash out, Mr. Lala notes.

“I don’t think that there’s a better yield versus liquidity option that’s available in the market,” he adds.

An “obvious pro” to this type of investment is that it is geared to rises in short-term rates, says Craig Ellis, vice-president and portfolio manager with Bellwether Investment Management.

“As the Bank of Canada continues to raise short-term rates through the course of this year, the yield should get better each time the bank moves higher assuming that the chartered banks follow suit – there’s no reason why they wouldn’t,” he explains.

These products are geared to those with short-term liquidity needs – they’re not meant to be a long-term investment – so you’re not locked into a term.

“That’s obviously a positive,” Mr. Ellis says, adding they are particularly easy to use if you already have a discount brokerage account.

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

Investors should shop around though, Mr. Ellis says, as a one-year GIC or some bank high-interest savings accounts might provide a higher yield if you have the flexibility to lock in your funds for a year or more.

There are a few negatives to keep in mind with these investments, Mr. Straus adds.

Investors looking at these products need to keep in mind that as an ETF, getting in and out will incur trading costs, and they are not included under Canada Deposit Insurance Corp. coverage. However, they do offer issuer diversification since the ETF likely invests with several banks, so the risk of default is very low. There are also taxes to pay on the income if the investment is held outside of a registered account.

Mr. Straus says another factor to consider is if interest rates don’t rise as expected and instead decline, the rate of return on these ETFs will decrease.

“People thought that rising rates were a sure thing, every year in the 10 years following the financial crisis,” he notes, but that didn’t happen.

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.