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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Stocks to ponder
Nvidia Corp. (NVDA-Q) Increased analysts’ estimates since its strong quarterly report last week have left the world’s most valuable chipmaker trading at its lowest forward earnings multiple in eight months, as Noel Randewich of Reuters reports.
VinFast Auto Ltd. (VFS-Q) Shares of the Vietnamese electric-vehicle maker surged more than 20 per cent on Monday, extending a rally from last week that more than quadrupled its market value to US$160-billion. The company made a blowout debut on Wall Street this month and has quickly grown in valuation to become the third-most valuable automaker - only behind Tesla and Toyota. As Reuters reports, it’s quite the incredible performance given that only 137 Vinfast electric vehicles were registered in the United States through June.
The Rundown
Historically stormy month of September may test U.S. stock rally
U.S. stock investors are bracing for a potentially volatile September as the market faces key economic data reports, a Federal Reserve meeting and worries over a possible government shutdown during a month of historically muted equity performance. David Randall of Reuters takes a look at a number of possible key inflection points ahead.
Also see:
Why the stock market’s summer doldrums are not a problem
BofA sees ‘trouble’ ahead for tech stocks despite big inflows
Hedge funds’ exposure to Magnificent Seven tech stocks at record: Goldman Sachs
Others (for subscribers)
The most oversold and overbought stocks on the TSX
Monday’s analyst upgrades and downgrades
Monday’s Insider Report: Two high-yielding stocks with million-dollar purchases
Globe Advisor
Multiple headwinds drive medical technology stocks as elective surgeries bounce back
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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 jheinzl@globeandmail.com)
What’s up in the days ahead
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Compiled by Globe Investor Staff
Rob Carrick