Three of the five bestselling exchange-traded funds last month offered nothing more exciting than a safe place to hold cash in an investment portfolio and earn an acceptable return.
The popularity of high-interest savings ETFs is a comment on the uncertainty in financial markets as we head into the fall. But it also shows that these ETFs are achieving mass acceptance and thus merit some scrutiny to help investors get value from them.
The ideal customer for high-interest savings ETFs has $5,000 to $10,000 or more in cash to park for months, is attracted by yields of 2.8 per cent to 2.9 per cent and is comfortable with a high level of safety that falls short of deposit insurance. If you use an online broker that charges nothing for stock and/or ETF trading, you’ve got a good reason to consider these products.
A quick note on who cannot buy high-interest savings ETFs: The online brokers BMO InvestorLine, RBC Direct Investing and TD Direct Investing block clients from buying these ETFs, which compete with in-house savings funds that offer lower rates.
High-interest savings ETFs have been around for almost nine years, and there are now six or so listed on the Toronto Stock Exchange and the NEO Exchange with total assets of roughly $8.5-billion. About $2.5-billion has flowed into these funds in 2022, which is not surprising when you consider the big rise in interest rates and shaky stock markets.
While the ETF business has been offering evermore complex products in recent days, high-interest funds are basic. They hold deposits at major Canadian banks – full stop. For example, the CI High Interest Savings ETF (CSAV-T) has its $3.1-billion in assets more or less equally spread between cash accounts at Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada and Bank of Nova Scotia. The after-fee yield on this fund was about 2.8 per cent in late August, comparable to others in the category.
The structure of high-interest savings ETFs does not allow for deposit insurance to protect money invested in these products against a bank becoming insolvent. By contrast, deposits in high-interest savings mutual funds can qualify for coverage by Canada Deposit Insurance Corp.
An offsetting benefit for high-interest savings ETFs is higher yields than you’ll find in high-interest mutual funds and other parking spots for cash. Right now, 2.25 per cent is a typical return from a high-interest mutual fund.
High-interest ETFs benefit from a sort of wholesale rate available to big investment companies. “The rate is more attractive than what you would be able to get as a depositor or as an individual investor because [banks] are taking into account the massive amount of institutional money in these deposits,” said Mark Noble, the executive vice-president of ETF strategy at Horizons ETFs.
Mr. Noble said the best way to calculate the real-life yield from a high-interest savings ETF is to take its gross yield and subtract the management expense ratio (MER). Both figures should be easily found in the fund profiles ETF companies provide online.
The unit price of high-interest savings ETFs shouldn’t change much over the years. Gains mainly come through monthly interest distributions – Mr. Noble said they’re calibrated to produce a yield that is between 0.45 and 0.5 of a percentage point above the Bank of Canada’s overnight rate. The overnight rate has risen steadily in 2022 and is expected to increase again on Sept. 7.
The six high-interest savings ETFs included in a directory of Canadian-listed ETFs by National Bank Financial:
- The aforementioned CI High Interest Savings ETF
- Evolve High Interest Savings Account Fund (HISA-NE)
- Horizons Cash Maximizer ETF (HSAV-T)
- Horizons High Interest Savings ETF (CASH-T)
- Ninepoint High Interest Savings Fund ETF Series (NSAV-NE)
- Purpose High Interest Savings ETF (PSA-T)
Note that HSAV is closed to new investment. One additional choice is Horizons USD Cash Maximizer (HSUV.U-T), which is for investors who want to hold U.S. dollars.
Given the similarity of holdings and structure, the main point of competition between high-interest savings ETFs is their MERs. Evolve has announced a temporary fee reduction (through Dec. 31) for HISA that should bring the MER to about 0.07 per cent, while for others it’s roughly 0.1 per cent to 0.18 per cent.
Beyond MERs, there are stock-trading commissions to consider. If you pay the $10 or so charged by some online brokers, a buy and sell order together on a $1,000 investment would cost you $20 – a 2-percentage-point drag on your returns. That’s why these ETFs are best suited for higher balances or for use at brokers that charge zero commissions for trading stocks or ETFs.
National Bank Direct Brokerage and Desjardins Online Brokerage both have zero commissions for stocks and ETFs, as does the Wealthsimple Trade app. The TD Easy Trade app offers 50 commission-free trades a year. CI Direct Trading and Questrade offer zero-cost ETF purchases but charge their regular commissions on sales. If you’re going to be a big user of high-interest savings ETFs, using one of these brokers will help maximize your returns.
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Rob Carrick