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Some readers have reported frustration in buying high-interest ETFs through bank-owned brokerages and expressed concern about their safety.
“TD claims that they ‘cannot’ let us invest in HISA ETFs because these ETFs ‘are not FDIC/CDIC-insured’ and are ‘risky,’ wrote reader Steve R.
He went on: “TD restricts you to the TD HISA account at rate of 4.5%. Putting the FDIC/CDIC issue aside, can you comment on how risky the underlying investments are? Some HISA ETFs have indicated precisely where the ETF money is being deposited (e.g., 20% BNS, 20% National Bank, 15% CIBC, etc.). I’m sure I’m not alone in that I’m putting serious money into these vehicles and thus holdings are unusually concentrated. Should we distribute money across HISA, cash, and the ETFs to lessen risk?”
The answer is that we really won’t know what the risk level is until these new ETFs have been subjected to a high-level stress test. For example, what would have happened if these ETFs had existed when the pandemic hit, and central banks cut interest rates to near zero to support the economy? Clearly, bank regulators took the potential risk seriously enough to increase liquidity requirements.
That move may reduce returns, but it should add a comfort level for people like our reader who have large amounts of money invested in these funds.
There are several of these ETFs from which to choose (if your brokerage account provides full access) but not all are the same. For example, most pay monthly distributions, which is great if you need cash flow. But the Horizons Cash Maximizer ETF (TSX: HSAV) does not. Rather, it allows interest to accumulate, enabling investors to claim a tax-advantaged capital gain when they sell rather than reporting more heavily taxed interest income.
This approach makes the fund appear more volatile. Over the past year, its unit price has varied between $103.60 and $109.68. Most HISA ETFs have a narrower trading range. For example, the CI High Interest Savings ETF (TSX: CSAV), traded between $50.00 and $50.22 over the past year.
HSAV has $2.2 billion in assets under management. It was launched in January 2020 and shows an average annual return of 2.12% since inception, as of Nov. 30. The one-year gain was 5.01%, which shows the impact of the Bank of Canada’s aggressive rate increases over the past 18 months.
If you plan to invest in one of these ETFs, make sure you know what you are buying. If you need cash flow, choose an ETF that makes monthly distributions. If not, a fund like HSAV is more suitable. And keep in mind nothing is guaranteed with these funds. Even with the new liquidity rules, we could see a decline in market prices when interest rates turn down.
Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.
Follow Gordon Pape on X at X.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.
Notes and Disclaimer
Content © 2023 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.
Image: iStock.com/Ivan-balvan
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