If the Bank of Canada raises interest rates again this year, high interest savings account ETFs are an ideal way for investors to benefit.
The federal Office of the Superintendent of Financial Institutions has been looking into HISA exchange-traded funds to see if they present a risk to the banking system. This week, OSFI said it would defer a decision until October.
OSFI could have required interim changes starting Aug. 1 that would likely have resulted in lower payouts from HISA ETFs. OSFI says any changes to HISA ETFs would not take effect until January, 2024, which means these funds remain attractive in the near term.
HISA ETFs have attracted more than $20-billion from investors seeking to park money safely while earning interest that increases every time the Bank of Canada raises its overnight rate. These funds typically pay about 5.2 to 5.3 per cent after fees, a rate that reflects the 0.25 of a percentage point increase in the overnight rate last week.
Money invested in HISA ETFs is placed in high-yielding savings accounts at Big Six banks. OSFI is looking into the potential effect on these banks if investors holding HISA ETFs cashed out all at once. It’s unclear what conditions would prompt investors to take this action, given that HISA ETFs are valued for their stability and are in no way a speculative investment. Still, OSFI has been gathering views on these products and will decide how to proceed in the fall.
OSFI said it received more than 175 submissions that included comments on all sides of the debate over how banks should classify deposits from HISA ETFs. One ETF industry estimate is that the return on HISA ETFs would drop by 0.5 of a percentage point if OSFI ordered changes.
The latest thinking in financial markets is that the Bank of Canada is done raising interest rates for now, but this will change in a flash if inflation worsens. HISA ETFs are an ideal way to squeeze the most out of current rates and leave yourself open to immediately benefit if rates rise. Expect the rate to be adjusted within 24 hours of the Bank of Canada is moving higher – or lower.
Investors have a growing number of ways to exploit high interest rates these days – guaranteed investment certificates, money market funds, treasury bills and a version of HISA ETFs that is bought and sold like a mutual fund. HISA ETFs stand out for their rates, and for a high degree of safety. These funds are not covered by Canada Deposit Insurance Corp., as mutual fund-style HISAs are. But with their money held in big bank deposits, there’s a high degree of safety.
Liquidity is another way HISA ETFs shine. As with all ETFs, you can buy and sell them at any time the stock market is open. Cashable GICs can’t match this flexibility.
HISA ETFs are available from such providers as CI, Evolve, Horizons, Ninepoint and Purpose.
Rob Carrick