There’s a corner of the financial world where interest rates never increased this year.
Check your brokerage account for full details. Accounts at full-service and digital brokers typically pay zero interest on uninvested cash these days, just as they did in the before-times prior to the rate surge of 2022.
The fact that brokers typically pay nothing on cash balances gives them an essentially cost-free source of funds to put to work for their own benefits, including offering margin loans at 7.5 per cent to investors who want to buy stocks with borrowed money.
Investors typically spend their time worrying about their stocks, bonds, funds and other securities. But as long as interest rates stay high, cash management is of equal or greater importance. Leaving uninvested cash in your brokerage account means throwing away easily accessible, low-risk returns that instead flow to your broker’s bottom line.
Try high interest savings account mutual funds as a parking spot for cash or, better, cash-equivalent exchange-traded funds. If you have a minimum $5,000 to $10,000 or more to keep safe, treasury bills are another option.
In recent years, you could ignore cash management in your brokerage account because rates on all safe havens were close enough to zero to make them irrelevant for many investors. Today, HISA mutual funds pay about 3.25 per cent, cash-equivalent ETFs offer a bit more than 4 per cent and T-bills offer similar rates.
Now, check out what these randomly sampled full-service and digital brokers were paying on uninvested cash lately:
- CIBC Investor’s Edge: zero
- Edward Jones: 0.01 per cent on actual cash balances, and up to 0.15 per cent in its Premium Interest Account
- Questrade: zero
- RBC Direct Investing: zero
- RBC Dominion Securities: zero
- Scotia iTrade: 0.25 per cent is available from the company’s Cash Optimizer Investment Account
- TD Direct Investing: zero
- TD Easy Trade (an app for mobile devices): zero
- Wealthsimple Trade: zero
Brokers defend the lack of interest paid on cash by saying their clients have access to a variety of cash alternative products. But these alternatives can, in a sneaky sort of way, generate further profits for brokers.
BMO InvestorLine, RBC Direct Investing and TD Direct Investing have long blocked clients from buying cash-equivalent ETFs and third-party HISA mutual funds. Clients who want to park cash conveniently at these brokers are basically limited to in-house HISA mutual funds or T-bills.
Brokers that do offer cash-equivalent ETFs benefit from the stock-trading commissions investors pay to buy and sell these products. These commissions range from $5 to $10 in round numbers and can quickly mount up if an investor moves money in and out of cash a lot.
Cash-equivalent ETFs hold their assets in big bank savings accounts paying about 4.25 per cent these days. The after-fee return for investors is about 4.1 per cent, which is quite respectable considering the minimal level of risk.
Returns on these ETFs are influenced by the Bank of Canada’s overnight rate, which is expected to rise by 0.25 or 0.5 of a percentage point next week and perhaps again later on before plateauing for a while. Cash equivalent ETFs will fade back into obscurity if rates fall hard, but for now they’re an appealing choice for investors who want to keep cash safe. They also offer a way to diversify, adding to bonds and GICs in the fixed income segment of an investment portfolio.
If you plan to use cash-equivalent ETFs a lot, consider using a broker or trading app with no commissions for stock and ETF trades. Desjardins Online Brokerage, National Bank Direct Brokerage and Wealthsimple Trade are in this group. CI Direct Trading and Questrade charge nothing to clients buying ETFs but normal commissions apply on their sale.
GICs are experiencing a popularity spike these days because yields of 5 per cent or slightly more were available at the start of December for terms of one through five years. But GICs are a weak option for cash because they can’t easily be sold before maturity unless you opt for a cashable version. The cost of extra GIC liquidity is a lower return.
TD Direct Investing offered one-year cashable GICs with rates as high as 3.35 per cent late this week, compared with non-redeemable one-year rates of as much as 5.09 per cent. Minimum purchases were either $1,000 or $5,000 depending on the issuer.
HISA mutual funds often have a minimum investment of $500 or $1,000. Yields are lower than with cash-equivalent ETFs, but you get the benefit of Canada Deposit Insurance Corp. coverage and, ideally, no trading commissions.
In a low-rate world, holding cash can rightly be seen as a blown opportunity to do something more productive with your money. But rising rates have rehabilitated cash, even with brokers refusing to pay an interest on uninvested balances in client accounts. Even with inflation running hot, earning virtually risk-free returns of 3 to 4 per cent in cash-equivalent ETFs, HISA mutual funds, T-bills and more has value.
Rob Carrick