The federal banking regulator has some concerns about a popular, sensible type of exchange-traded fund that offers a 5 per cent yield with negligible risk.
There’s more than $20-billion invested in high interest savings account ETFs, which is a reflection of their popularity as a way to park money safely and benefit from high interest rates. If you’re a fan of these ETFs, you have three days to let regulators know how much you value them.
HISA ETFs invest their assets in savings accounts at big banks that currently produce a gross yield of about 5.2 per cent, or close to 5.1 per cent after fees. The Office of the Superintendent of Financial Institutions is concerned about the effect on banks if investors holding HISA ETFs cashed out en masse. OSFI is accepting input from interested parties on these ETF until June 21. You can have your say by e-mailing consultations@osfi-bsif.gc.ca.
OSFI says changes to HISA ETFs, if required, would take effect next year. One ETF industry estimate is that about 0.5 of a percentage point could be lopped off the returns from HISA ETFs if OSFI requires banks to classify these deposits differently than they are now.
Recent events in U.S. banking have shown that the risk of a run on bank accounts is real, not theoretical. But it’s difficult to project a situation where Canadian investors would dump their HISA ETFs all at once. In fact, these products are an ideal parking place for cash in uncertain times because of their stability.
If you’re leaving a comment for OSFI, consider mentioning how you use HISA ETFs. Broadly speaking, these funds are not a hot-money product where money sloshes in and out in waves. HISA ETFs are being used to park cash in investment accounts, as an alternative to traditional savings accounts and as a replacement or diversifier for traditional bond ETFs.
A lower yield on HISA ETFs isn’t necessarily a deal-breaker – these products would still quite likely offer better returns than a related HISA product that is bought and sold like a mutual fund. Also, there are money market ETFs that offer comparable yields to HISA ETFs, though with somewhat more risk.
Still, HISA ETFs have a unique role in the investing world right now in that they help investors squeeze maximum yield from their cash with a minimal prospect of losing money. OSFI’s mission is to protect the integrity of the banking system, and that’s vital. But the continued availability of a kind of ETF that empowers everyday investors is important, too.
– Rob Carrick
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.
Stocks to ponder
Potash prices are in the dumps, but the battered shares of companies that produce the crop nutrient have been nudging higher, suggesting the worst days for the sector may be behind it. David Berman explains why Nutrien Ltd. and other stocks might now be worth a look.
The Rundown
Investors face an interesting paradox these days: The world’s most widely followed stock market index, the S&P 500, appears expensive, no matter how you gauge such things; however, most individual stocks in the index look to be reasonably priced. Ian McGugan explains the contradictory evidence.
The sales culture at major Canadian banks works to push customers into high-fee products. Disclosure of fees and conflicts of interest have been improved, and there have been attempts to clean up the use of professional titles. But sales practices have been largely untouched by regulators. Tim Shufelt and Clare O’Hara investigate.
If you want a lesson in humility, challenge your readers to a stock-picking contest. It’s a lesson that Globe Investor staff have recently learned.
Others (for subscribers)
- Monday’s analyst upgrades and downgrades
- REITs stabilize but investors should remain highly selective: RB analyst
- The most overbought and oversold stocks on the TSX
Globe Advisor
Are you a financial advisor? Register for Globe Advisor (www.globeadvisor.com) for free daily and weekly newsletters, in-depth industry coverage and analysis.
Ask Globe Investor
Question: I own the iShares S&P/TSX Composite High Dividend Index ETF (XEI). On my T3 slip for 2022 I discovered that eligible dividends accounted for just 15 per cent of the fund’s total distributions, with the vast majority consisting of capital gains. I then checked the Morningstar financial website, which also showed a relatively small contribution from dividends. Am I missing something?
Answer: Those numbers don’t seem right. Third-party financial websites often provide flawed data, which is why I always recommend going straight to the source, which in this case is ETF provider BlackRock Canada.
If you refer to the “2022 Distribution Characteristics” document available on the BlackRock Canada website (look under “Resources” and “Tax Centre”), you’ll note that XEI distributed $1.15733 of eligible dividend income per unit in 2022. This represented 99.2 per cent of the $1.16671 in total cash per unit it paid out during the year.
The ETF also declared a non-cash or “phantom” distribution of $1.9381, which reflected capital gains the fund reinvested but did not pay out to unitholders. Even though you didn’t receive these capital gains in cash, they were taxable in your hands. (Tax tip: Make sure you, or your broker, increase the adjusted cost base of your units by the amount of the reinvested distribution. Otherwise, you could end up paying more tax than necessary when you eventually sell your units.)
Including all cash and non-cash amounts, XEI distributed a total of $3.10481 in 2022. Of this, eligible dividends accounted for about 37.3 per cent, and capital gains made up about 62.4 per cent (The numbers don’t add up to 100 per cent because XEI also distributed very small amounts of foreign income and return of capital.)
I don’t know why the numbers in your T3 slip don’t line up with the data from iShares. It’s possible that some of the boxes on your tax slip include income from more than one investment, which would explain the discrepancy. It’s also possible that a mistake was made. I suggest you review your broker’s year-end summary of trust income, focusing on the amounts from XEI. Compare this with information from the iShares website to see if the amounts – adjusted for the number of units you own – match up. Follow up with your broker if you’re unable to reconcile the amounts.
– John Heinzl
What’s up in the days ahead
Click here to see the Globe Investor earnings and economic news calendar.
More Globe Investor coverage
For more Globe Investor stories, follow us on Twitter @globeinvestor
Compiled by Globe Investor Staff