Should You Invest in a High-Interest ETF? - Cashflows and Portfolios (2024)

Some fans of this site own dividend-paying stocks for income and growth. We do too!

Other fans of our site own low-cost Exchange Traded Funds (ETFs) to passively ride market returns. Yes, we do too!

But there are many other ways to invest…including the use of a high-interest ETF for some cash buffer against bonds and equities as asset classes.

Even with interest rates starting to trend downward, we wondered: should you invest in a high-interest ETF?

Read on to find out our most recent take!

What is a high-interest ETF?

Last time we posted this article, before this update in 2024, we were watching our federal banking watchdog – The Office of the Superintendent of Financial Institutions (OSFI for short) was looking to clamp-down on some high-interest ETFs.

Well, the findings are in:

“…after a thorough and extensive consultation, OSFI has decided to uphold those principles by maintaining the liquidity treatment of wholesale funding sources with retail-like characteristics, such as high-interest savings account exchange-traded funds (HISA ETFs).”

Which means, such ETFs (which blend characteristics of a savings account with an exchange-traded fund) will stick around for you and me. ;)

The ruling mentioned any deposit-taking institutions (DTIs) must hold sufficient high-quality liquid assets, such as government bonds, to support all HISA ETF balances that can be withdrawn within 30 days. From the OSFI:

“All DTIs should apply this treatment, as outlined in OSFI’s Liquidity Adequacy Requirements Guideline, by January 31, 2024, if they are not already doing so.”

We continue to see this is great news for retail investors since high-interest ETFs are hybrid products that offer distributions/interest like any interest savings account would but they could be better – they can offer even better interest rates.

Recall an ETF is a security listed on a stock exchange like the Toronto Stock Exchange (TSX). Rather than representing ownership of any one company’s equity or debt, an ETF is often a basket of stocks or bonds or both.We’ve offered up a few posts on our site, regarding some of our favourite ETFs to own and why.We’ll provide links below at the end of this post.

A reminder that not every ETF is “passive”.

Hardly.

But those passive ETFs that do exist since they are more concerned with being the market vs. beating the market. For example, an ETF that tracks the entire TSX index would own all of the stocks in the S&P/TSX Composite Index, as opposed to the fund manager picking stocks that he/she believes will outperform the index.

These are some of the best passive ETFs in Canada to own.

A high-interest savings ETF is like a savings account that trades on the stock market. The bank(s) pay interest to the ETF, which pays out this interest income to its unit owners.

High-interest ETFs or cash ETFs are hybrid funds that function like high-interest savings accounts, yet offer much better interest rates. Unlike any guaranteed investment certificates (GICs), investors can consider liquidating their position in the fund, at any time, just like draining their bank account(s).

When it comes to payments of these ETFs:

“Cash ETFs are able to pay high(er) interest rates because select banks offer them access to wholesale funding – that is, the banks pay the funds premium interest rates they would normally reserve for institutional clients, or for large orders. Similar rates would be available to wealthy retail investors who wanted to deposit millions of dollars.”

Source: Globe and Mail.

We believe many high-interest ETFs or cash ETFs are worth owning.

What are the advantages of high-interest ETFs?

We see a few:

We like high-interest savings accounts (not ETFs) for a simple reason: CDIC insurance.

Financial institutions that are members of the Canada Deposit Insurance Corporation (CDIC) insure savings of up to$100,000, while credit unions are insured provincially and usually cover the full deposit, with no limits. Money that is deposited in a savings account generates interest by allowing the bank to access those funds to loan to others. Unlike your cash savings, these high-interest ETFs are not eligible for CDIC insurance.

• Don’t forget ETFs have money management fees.The dawn of commission-free investing offers at least a partial solution – depending on your brokerage – there might not be any trading commissions (e.g., $9.95 or less) to buy your cash ETFs. But, fees don’t end there. Any company that offers the high-interest ETF is going to charge you a money management fee. Some are low, some are higher, as always in personal finance and investing “it depends”. So, depending on how much you have to invest, this fee may or may not be worth it. We would advise any/all investors to keep any money management fees to a minimum.
• All the risk but little to gain?In our Bonds vs. GICs post, we told you this and we still feel that way:

“…This makes bonds helpful, generally speaking in our opinion when the markets tank to hold on and/or for rebalancing. That’s about it.”

If you need the security of cash, i.e., money must be there in a year or so then go with a higher-interest savings account or GIC that has CDIC coverage.

Otherwise, some of these high-interest ETFs will do just fine.

Should you invest in a high-interest ETF?

Totally up to you of course but at Cashflows & Portfolios we’re always looking into some yields and deals.

We feel with commission-free investing, some of the benefits outweigh any risks and it’s worth owning some of these ETFs in your portfolio. We might consider the corporate class one from Global X in fact in each of our corporations respectively!

Here are some of the more popular choices to date (information current to the time of this post) when it comes to your decision: to invest in a high-interest ETF.

Yield at time of post:

• Purpose High-Interest Savings ETF (PSA) = 4.71% yield* *Also available in F-series and A-series funds. This fund, with a focus on low risk, the fund strategically allocates assets to high-interest deposit accounts with Schedule I Canadian banks and short-term Bank of Canada Treasury Bills, backed by the credit of the Canadian government.

• Ninepoint High-Interest Savings ETF (NSAV.NE) = 4.90% yield* *0% management fee on F-series funds. This fund, should be used as a high-quality, short-term asset for investors who want to earn a better rate of return on their idle cash.
• CI High-Interest Savings ETF (CSAV) = 4.57% yield. Based on the fund information, the investment objective of this fund is to maximize monthly income for unitholders while preserving capital and liquidity by investing primarily in high interest deposit accounts.

• Evolve High-Interest Savings Account ETF (HISA.NE) = 4.58% yield. With a low management fee, this HISA seeks to maximize monthly income while preserving capital and liquidity by investing primarily in high-interest deposit accounts.

• Global X High-Interest Savings ETF (CASH) = 4.79% yield. CASH invests almost all of its assets in high-interest deposit accounts with one or more Canadian chartered banks, which could provide a higher interest rate than a traditional savings account.
• Global X Cash Maximizer Corporate Class ETF (HSAV) = nil* *HSAV is different…HSAV invests almost all of its assets in high-interest deposit accounts with Canadian chartered banks, which provide a higher interest rate than a traditional savings account. *HSAV is not expected to make taxable distributions, which could enhance the after-tax performance of HSAV versus other cash savings vehicles, particularly if held in a taxable account.

There are also cash-alternative ETFs worth owning in the form of T-Bills.

My Own Advisor owns one of those products in fact and held this interview with Mark Noble, on those products, from Global X:

Are Cash-Alternative ETFs Right for You?

Notes:

• Yields current to time of this post; including brief references from each provider. Yield is subject to slight fluctuation and change.
• Many ETFs are RRSP eligible, although you may decide to invest in these funds in other accounts. See specific fund eligibility for details.
• Depending on the fund, investments could be in one or more Canadian banks. Please read any fund prospectus carefully before investing.

HISA vs. High-Interest / Cash ETFs

We want to point out that terminology is important…there is a difference between High-Interest Savings Accounts (HISA) and High-Interest ETFs.

• HISAs are deposit accounts that offer more competitive interest rates than traditional savings accounts while still allowing you to use the funds whenever you like.
• High-Interest ETFs are investment funds that aim to replicate the returns (or higher) that you would see from a HISA.

The reason why many DIY investors continue to own HISAs vs. High-Interest ETFs is those savings accounts are simple to use. That said, the returns you get from a HISA could be smaller than High-Interest ETFs these days so consider that decision and need for CDIC insurance amongst the rest of your portfolio.

Should you invest in a high-interest ETF summary

Related Reading:

Bonds vs. GICs – which is better and when?

Check out some of our favourite low-cost and diversified ETFs for your RRSP.

You should consider using some form of Cash Wedge as you plan for semi-retirement or retirement.

Need some support? We’re here to help!

Knowing how to demystify the retirement income puzzle, using cash ETFs or not, is not trivial work but it’s absolutely something we can help with. If you need some help solving your retirement decumulation puzzle (i.e., how to efficiently withdraw from your retirement accounts), or figuring out if you have enough saved to spend for your retirement income plans, we’re here to help answer those questions and more!

If you are interested in obtaining private projections for your financial scenario,please contact us here to get started.

Thanks for your ongoing readership and for sharing this site with others.

Mark and Joe.