The risk of losing money in an investment savings account is pretty much zero, even as you earn interest at rates above even today’s inflation rate.
But a reader recently reported an experience with investment savings accounts that highlights a way they can trip up an unwary investor. The cost of this misadventure was a hefty amount of margin interest charged by his broker.
Investment savings accounts are a way to park money safely in a brokerage account and earn a return of 4.55 to 5 per cent. ISAs hold assets in bank savings accounts that are typically eligible for coverage through Canada Deposit Insurance Corp. ISAs are bought and sold like mutual funds, typically with no fees to buy or sell.
This reader used an ISA sold through a major online broker. A while back, he decided to withdraw some of the money out of his ISA to use elsewhere. He did this by transferring money from his brokerage account to his chequing account.
The right way to access money from an ISA is to sell some or all of your holdings, wait for the cash to show up in your brokerage account and then transfer it. By skipping these steps and regarding the ISA like plain old cash, this individual put himself in negative balance in his brokerage account. Because it was a margin account, which lets you transact using money borrowed from your broker, interest was charged on the negative balance at a rate that was close to 9 per cent over a span of several months.
This reader acknowledges the mistake he made in thinking that an investment savings account could be treated like any savings account. Let’s just call his broker unsympathetic about this misadventure. The bill for margin interest stands, as does this reader’s determination to warn over investors about investment savings accounts.
It’s worth noting here that, even in this period of high interest rates, cash left uninvested in a brokerage account continues to generate a zero return. ISAs, and a new crop of exchange-traded funds that perform a similar service, are the right way to productively put cash in an investment account to work.
-- Rob Carrick, personal finance columnist
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Stocks to ponder
Telus Corp. (T-T) The stock is near levels last seen during the pandemic lockdowns in 2020 and is offering a yield near 6.5 per cent. Some investors might be opting for safer government bonds over a riskier dividend stock, especially when bonds are offering similar cash payouts. And there are other negative factors at work here in Telus’s share price, and telecoms in general. But as long-term bets, the current beaten-up share prices and lofty dividend yields are hard to ignore, says David Berman.
Walmart Inc. (WMT-N) vs. Target Corp. (TGT-N) In these stressful times of inflation and rising interest rates, Walmart is crushing Target at the place where it really counts: the cash register. Second-quarter results show how customers feel about the two chains. Walmart is enjoying a very successful year and the stock recently touched an all-time high. Target, by contrast, has seen a drop in sales, although profits are holding up. Gordon Pape sizes up the situation and concludes that one deserves more attention if you’re shopping for a retail stock right now.
The Rundown
Fed-wary investors eye mounting risks to U.S. stock rally
A hawkish stance from the Federal Reserve, soaring Treasury yields and a looming government shutdown are adding to a cocktail of risks that has spooked investors and clouded the outlook for U.S. equities, reports David Randall of Reuters.
Oil price rally set to falter as demand doubts loom
Oil prices may be near $100 a barrel, but a range of factors could prevent a sustained rally above that level, analysts say.
Inverted U.S. yields lure investors into short-term bonds
Short-term U.S. government bonds have attracted bigger investment flows this year than longer-term paper, an unusual pattern engendered by the inverted yield curve and the Federal Reserve’s intent to keep interest rates higher for longer.
Others (for subscribers)
Monday’s analyst upgrades and downgrades
Big media rallies on signs of end to Hollywood writers’ strike
Activist fund manager targets Northwest Healthcare REIT
Ask Globe Investor
Question: I frequently read articles in The Globe about individual stocks where a performance comparison is made with the S&P/TSX Composite Index. I wonder if these articles are comparing apples to apples or apples to oranges. Often, but not always, the articles specify whether the stock’s performance is based on simple price return or a total return that includes dividends. But what about the index? Does the performance of the S&P/TSX include the dividends generated by the stocks in the index?
Answer: Typically, when the media report returns for the S&P/TSX (or any other index), they are referring to the simple return, excluding dividends.
If you’re interested in total return of the index over a certain period, including dividends, you have a couple of options.
One of the easiest methods is to use the free “compound returns calculator” at canadastockchannel.com. If you enter a stock symbol and specify a start and end date, the calculator will determine the stock’s total return for the period, as well as the annualized total return. It will also compare the stock’s total return to the simple price return of the S&P/TSX. But, as you pointed out, this is an apples-to-oranges comparison.
To determine the S&P/TSX’s total return, including dividends, simply enter the symbol of a low-cost index exchange-traded fund as a proxy for the index. For example, you could use the iShares Core S&P/TSX Capped Composite Index ETF (XIC-T), which tracks the index closely thanks to its low management expense ratio of 0.06 per cent.
According to the calculator, XIC produced a total return of 8.53 per cent for the year ended Aug. 31, which is very close to the one-year total return for XIC of 8.43 per cent provided on the iShares website. For comparison purposes, iShares also provides the total return for the index, which was 8.49 per cent over the same period. These numbers don’t match exactly, but they are pretty darn close.
Another option for determining the index’s performance, including dividends, is to look up historical values for the S&P/TSX Capped Composite Total Return Index. This index – which computes its daily value assuming all dividends were reinvested – is not as widely reported as the simple S&P/TSX. You can find it by entering the index’s name into the search box at investing.com.
Once you have determined the starting and ending values for the S&P/TSX Capped Composite Total Return Index over a certain period, the percentage change represents the index’s total return for that time frame.
--John Heinzl (E-mail your questions to jheinzl@globeandmail.com)
What’s up in the days ahead
Rob Carrick looks at what it means to borrowers, investors and taxpayers if it’s true that we have reached the end of the low interest rate era.
Investors look for signs of recession in Canada’s GDP in this week’s Advisor Lookahead
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Globe Investor Staff
Rob Carrick