What happens to my high-interest ETF when rates fall?

Now is the ideal time to study the potential downside of the high interest savings accounts ETFs investors have been flinging themselves into with abandon.

In one typical recent week, these exchange-traded funds accounted for three of the top four selling funds and four of the top 10. Investors love the 5 per cent returns, the liquidity of owning what is essentially a savings account that trades like a stock, and the minimal risk of losing money.

HISA ETFs keep their assets in bank savings accounts that produce a jumbo-size return. There’s no deposit insurance, but you have the security of knowing your money is parked at some of the country’s biggest banks. Still, investors have questions. “I was wondering about the risk of price declines for these ETFs,” a reader said recently by e-mail. “Right now, the price of one share is fairly stable – like, for instance, at $50. Can you share your thoughts on that?”

The custom with HISA ETFs is for the price to be pegged at a base of $50 per unit. The unit price will rise mildly as interest accumulates through a month, then decline back to $50 when interest is paid to unitholders

Raj Lala, president and CEO of Evolve ETFs, said the price of a HISA ETF should not fall below $50. “The only risk of it dipping below $50 is if the Bank of Canada overnight rate becomes negative, or one of the Big Six banks becomes insolvent…obviously, very unlikely outcomes,” he said in an e-mail.

Changes in HISA ETF returns track the overnight rate, which has jumped to 5 per cent from 0.25 per cent in early 2022. The big risk with these ETFs is a sharp decline in rates and, in turn, interest payouts. A 5 per cent return with minimal danger of losing money looks darn good. But if that return falls to, say, 2 to 3 per cent, investors may find themselves losing out on potentially much better stock market returns.

One more risk to be aware of with HISA ETFs is an ongoing regulatory review of how their deposits at banks are accounted for. The Office of the Superintendent of Financial Institutions is expected to announce a decision next month. If accounting changes are required, expect payouts to fall by an estimated 0.5 of a percentage point starting in January.