The exchange-traded fund that offers a low-risk place to park money and savings is attracting a lot of money – and questions.
The popularity of high interest savings account exchange-traded funds can be summed up with this line from a report by National Bank Financial on February sales trends: “Cash-like high interest savings ETFs continue to rake in money with another $1 billion inflow.”
The basics for HISA ETFs are as follows: Money from investors is placed into banks savings accounts yielding about 4.85 per cent after fees. Investments in these ETFs do not benefit from deposit insurance, but big bank savings deposits offer a higher level than most anything aside from government bonds and Treasury bills.
Requests for more information about these ETFs have been rolling in steadily lately. To get some answers, I checked in with Raj Lala, president and CEO at Evolve ETFs. The company’s lineup includes the $1.4-billion Evolve High Interest Savings Account Fund (HISA-NE).
Q: When I look at quotes for HISA ETFs online, the yield is less than 4.85 per cent. Why is that?
A: Mr. Lala said the yields shown online reflect the gradual impact of rising rates in the past 12 months. “What everybody should be looking at is the current yield, because it’s based on what you would get if you were to buy today,” he said. Mr. Lala said the current yield for HISA ETFs reflects the Bank of Canada’s overnight rate, currently 4.5 per cent, plus 0.5 of percentage point. Fees, usually in the area of 0.15 per cent, reduce that slightly on a net basis.
Note: It’s possible that banks holding HISA ETF deposits could decide to adjust the rate they offer, potentially by reducing the spread over the Bank of Canada overnight rate. This potential for lower payouts was highlighted in a Globe and Mail story this week about federal banking regulators launching a review of HISA ETFs. If the regulator takes issue with these products, the result could be a lower payout.
Q: How do the interest payments from HISA ETFs work, and what should I expect from the unit price?
A: HISA ETFs typically make monthly payments of interest, and the unit price is anchored at $50. Mr. Lala said the unit price will rise through the month to $50.20, then fall back to $50 after the interest payment is made. “Some investors will look at their statement and think they’re down because they bought at $50.10 and now [their fund] is trading at $50,” he said. “They’re forgetting about the interest that was actually paid to them.” Mr. Lala said the best time to buy HISA ETFs is on the ex-distribution date, which you can find in your digital broker’s stock quotes. That should get you close to a price of $50 per unit.
Q: What about reinvestment of interest payments?
A: Mr. Lala said HISA mutual funds offer this. For reinvestment of interest from HISA ETFs, you’ll need to see if your broker will set up a dividend reinvestment plan, or DRIP, for you.
Q: Why is the yield on these ETFs so high in comparison to the rates paid on other bank savings products?
A: Mr. Lala said banks are able to offer higher yields on deposits associated with HISA ETFs because there are no costs to acquire or maintain this money. He said banks may also view these products as a way to diversify their deposit base.