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If you’re looking for a safe parking spot for investing cash in these troubled times, it’s hard to beat the high interest savings account packaged as a mutual fund.

Covered by Canada Deposit Insurance Corp., these products are well-suited to investors who want to keep cash secure while they evaluate their investing options. A next-best choice is the high-interest savings account exchange-traded fund, a new but popular option for holding cash in your investment account. Finally, running a distant third, is the money market fund.

It’s hard to see why anyone would choose a money market fund beyond nostalgia for the days when they were a big part of the mutual fund scene. Fees for these funds are excessive, and that’s a big problem in this period of ultra-low interest rates.

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Yields on the securities held by money market funds – short-term government and corporate debt – have plunged in the pandemic-driven economic downturn. There’s now some concern that money market fund returns will fall short of fees. Without fee cuts, investors could lose money.

In the world of personal finance and investing, there are two different types of cash. One type is for emergencies or savings goals in the next five or so years. For this money, use a high-interest savings account at one of the alternative banks or credit unions offering rates of 2 per cent or more.

The second type of cash is part of your investments as opposed to your savings. This is money you want to shelter from the volatility of the stock and bond markets, while retaining the option to quickly deploy it in response to market conditions and earn at least some return.

You could let this type of cash just sit in your investment account, but it’s unlikely you’ll earn any interest at all from your broker. You can get both safety and at least some crumbs of yield using a range of securities offered by investment dealers to clients seeking a safe parking spot for investing cash.

High-interest savings account mutual funds and ETFs plus money market funds are the most practical choice for DIY investors. Direct holdings in securities such as treasury bills, banker’s acceptances and commercial paper are also a possibility, but they’re not that useful. Yields are negligible, the selection at online brokers can be spotty and the minimum order can be $10,000 or more in some cases.

In good times for financial markets, you’d put yield foremost in choosing a product to hold cash in your investment account. Today, safety takes precedence. In that regard, money market funds offer a degree of uncertainty because of shrinking returns and high fees.

The problem with money market fund fees threatening to overwhelm returns isn’t a new one. Back in the 2008-09 financial crisis, individual fund companies cut the management expense ratios (MERs) on their money market funds or otherwise absorbed costs to keep investors from losing money. Paul Bourque, president and chief executive officer of the Investment Funds Institute of Canada, expects the industry to do likewise this time around.

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“It’s an important point of confidence,” Mr. Bourque said. “There’s a real incentive to not only keep the clients whole, but to maintain confidence in the market.”

Karen McNally, a vice-president and head of investment solutions at RBC Global Asset Management, said via e-mail that her firm also expects to see fund companies lowering MERs if required. She also noted that like many fund companies, RBC offers high-interest savings account mutual funds as an alternative to money market funds.

“In recent years, many investors have been taking advantage of high-interest savings accounts as their preferred option,” she said.

The rise of high-interest savings account mutual funds has left money market fund assets at less than half the level of spring 2009, the last time stocks crashed. Still, assets in money market fund assets did jump to $36.4-billion in March from $32.1-billion in February. Old habits die hard.

The big selling point for savings account mutual funds in a period of economic confusion is that CDIC coverage is pretty much a standard feature. Think of these funds as a deposit at a CDIC-member bank, packaged as a mutual fund.

CDIC protects eligible deposits for up to $100,000 in combined principal and interest. Investment companies offering mutual fund high-interest accounts work around this limit by offering a few different series of these products, each with its own $100,000 limit. The net result is that someone with, say $150,000 to park, could buy two different series of the same high-interest savings mutual fund and have deposit insurance coverage for the full amount.

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The interest rate on high-interest savings account mutual funds was in the 0.15- to 0.5-per-cent range in mid-May (compare rates at riskingtime.com/hisa-rates). Money market yields were in a similar zone, while savings account ETFs came in a little higher than both.

Savings account ETFs hold deposits at multiple big banks, but their structure doesn’t allow for CDIC coverage. In exchange for the slightly higher risk level, savings account ETFs offer higher yields than their mutual fund counterparts and money market funds.

“Banks are offering institutional level of interest, which makes these ETFs more attractive than what you could get as an investor in a high-interest account,” said Mark Noble, executive vice-president of ETF strategy at Horizons ETFs Management (Canada) Inc. Institutional investors get better deals because they buy in bulk.

Mr. Noble said savings account ETF yields are typically calculated as the Bank of Canada overnight rate, currently 0.25 per cent, plus a markup of 0.5 of a percentage point. After fees of 0.08 per cent, the net yield for investors was close to 0.7 per cent in mid-May for the Horizons Cash Maximizer ETF (HSAV).

Warning: Savings account ETFs are not offered at some brokers because they want you to use their in-house savings account mutual funds. Also, if they do offer them, you’ll likely have to pay a brokerage fee of $5 to $10 or so per trade. On the other hand, there’s intense competition between companies offering savings account ETFs that has led to low fees. Horizons has cut the MER on HSAV to 0.08 per cent from 0.18 per cent until further notice.

For the best yield on safe parking spots for cash in your investment account, savings ETFs are a top choice. For safety and also transparency, high-interest mutual funds rule.

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Dan Hallett, vice-president of research at HighView Financial Group, said the yield you see on high-interest mutual funds is the yield you get. There’s no management expense ratio to cut into the return, as there is with money market funds and high-interest savings ETFs.

Mr. Hallett’s take on money market funds is that they’re a kind of fund industry fossil. “The high-interest account just seems more intuitive and appealing,” he said.

Note: For a full report on savings account mutual funds and ETFs, consult The Globe and Mail’s DIY Investor’s Guide to the Best Places for Parking Cash in an Online Broker Account (tgam.ca/carrick-parkcash).

Fees Versus Returns

Shown here are recent returns for a selection of Canadian money market funds. Notice how returns are being squeezed by low interest rates on the short-term debt these funds hold. Where practical, Series D versions of money market funds have been shown. They have reduced fees to reflect the fact that they're designed for DIY investors. All data to April 30.

FundAssets
($-mil)
MER
(%)
1-mo.
% rtn
(after fees)
3-mo.
% rtn
(after fees)
6-mo.
% rtn
(after fees)
12-mo.
% rtn
(after fees)
Beutel Goodman Money Market Fund Class D2610.220.10.40.81.6
BMO Money Market Fund Series D330.710.00.20.51.1
CIBC Money Market Fund Class A2,1680.710.10.30.61.2
Fidelity Canadian Money Market Fund Series B4390.750.00.20.41.0
PH&N Canadian Money Market Fund Series D2550.590.10.30.61.3
RBC Canadian Money Market Fund Series D1820.610.10.30.61.3
Scotia Money Market Fund Series A1,1810.890.00.20.51.0
TD Canadian Money Market Fund Series I1,9110.660.00.20.51.2

Source: Fundata

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