High interest savings account ETFs are like a Swiss army knife for your portfolio.
You can use these exchange-traded funds to park cash that has accumulated in your investment account for near-term or later use. You can use them to generate monthly interest income. And, you can use them as a substitute or supplement to bonds.
HISA ETFs pay after-fee interest of about 5.3 per cent, with minimal risk. Assets are held in big bank savings accounts paying much higher rates than retail bank clients receive. Investors have picked up on these ETFs as a bond alternative because they pay interest like bonds and offer a strong hedge against stock market declines. Bonds also protect against falling stocks, but not without fail. Investors learned that lesson the hard way in 2022, when rising interest rates pummelled bonds at the same time as stocks declined.
The interest rate on HISA ETFs is directly influenced by the Bank of Canada’s overnight rate, which seems likely to remain steady or increase a bit over the next several months. Only when inflation truly seems beaten will the central bank start to reduce the overnight rate.
At that point, people using HISA ETFs as a bond substitute may want to reconsider. Each rate cut by the Bank of Canada will erode the return from HISA ETFs. Meanwhile, bonds will come into their own with a total return that could easily exceed what HISA ETFs offer.
The benchmark FTSE Canada Universe Bond Index has a yield to maturity of about 4.7 per cent right now, or 4.6 per cent if you buy an ETF that tracks the index. That’s a good foundation for buying a bond ETF right now.
Falling rates would add to that appeal by pushing up bond prices and making both bonds and bond funds more valuable. In 2020, when interests plunged, the FTSE Canada Universe Bond Index produced a total return of 8.7 per cent that was based on interest paid out plus capital gains.
Bonds lost a lot of cred as a portfolio stabilizer in 2022, when the index fell 11.7 per cent. Part of the appeal of HISA ETFs is that they deliver what everyone wants from bonds but didn’t get last year - minimal drama, along with a nice rate of interest. Be ready to modify your thinking on bonds and HISA ETFs when rates start to fall.
One final note about HISA ETFs: Banking regulators have been looking at how these products would impact banks if investors suddenly cash out all at once. A decision is expected in October on whether to introduce changes to banking regulations that would result in slightly lower payouts for HISA ETFs.
-- Rob Carrick, personal finance columnist
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Ask Globe Investor
Question: When I screen for exchange-traded funds, I often find ETFs that are composed of several other ETFs. Do I have to pay the management expense ratios on all the underlying funds, in addition to the fund I am investing in directly? If so, that would exert an additional drag on performance.
Answer: No, you do not pay two layers of management fees and expenses. You pay only the management expense ratio of the fund you purchase. For example, as Vanguard Canada explains: “For any fund which invests in underlying Vanguard fund(s), there shall be no duplication of management fees chargeable in connection with the Vanguard fund and its investment in the Vanguard fund(s).” The same is true for other ETF providers.
--John Heinzl (E-mail your questions to email@example.com)
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