The wild stock market swings in recent weeks are making the increasingly popular high-interest savings exchange-traded funds even more appealing to investors seeking safety.
Investors put about $831-million in high-interest savings ETFs so far this year, as of Feb. 28, according to Ian Tam, director of investment research for Canada at Morningstar. That’s a huge jump from just $67-million for the same two-month period last year, when there were also fewer of these ETFs on the market.
Fears of the global economic impact of the spreading coronavirus and ongoing concerns over the strength of the long-running equity bull market, as well as last year’s global trade wars, have spurred investors to move more money into cash and cash alternatives such as high-interest savings accounts.
High-interest savings ETFs primarily invest in high-interest deposit accounts with Canadian banks, credit unions or trust companies, with yields after fees in the 2-per-cent range and management-expense ratios (MER) of around 0.15 per cent.
While trading commissions can potentially cut into returns for these funds, high-interest savings ETFs are considered an alternative to holding large sums of cash.
“These kinds of products work for those investors wanting to take risk off the table," says Peter Tomiuk, senior vice-president of ETF strategy with CI Investments, which has its own high-interest savings product. “You can’t go any less risky than cash.”
Benefits of the ETFs products include earning an interest rate that’s higher than some guaranteed investment certificates (GICs) and most savings accounts, monthly income, liquidity, low cost, flexibility and convenience, Mr. Tomuik says. He believes the products work best for investors with specific goals.
“Those who really require liquidity and cash in the near future, absolutely it makes sense,” he says. “There’s always a need for cash.”
Assets have been steadily flowing into high-interest savings ETFs in recent years, well before the coronavirus hit, as investors worried about the impact of global trade wars, a slowing global economy and the potential end of the decade-long bull run.
There’s currently about $5-billion in assets under management (AUM) across five high-interest savings or money market fund ETFs in Canada, Mr. Tam says. That figure includes the iShares Premium Money Market ETF (CMR) which launched in February, 2008, has AUM of $425-million and an MER of 0.28 per cent and falls into the money-market fund category, as do the high-interest savings ETFs. The fund has returned 1.6 per cent over the past year. (All performance data from Morningstar as of market close on March 10. MER data from National Bank Financial and Morningstar.)
About $2.4-billion was invested in high-interest savings ETFs in 2019 alone, an increase of 130 per cent from $1-billion in 2018, and up 460 per cent from $192-million in 2017.
The Purpose High Interest Savings ETF (PSA), from Purpose Investments Inc., was the first high-interest ETF to hit the market, debuting in October, 2013. It has $2.4-billion in AUM, an MER of 0.15 per cent and a return of 2.2 per cent over the past year.
Others came to market in recent months, including the CI First Asset High Interest Savings ETF (CSAV), launched in June, with about $2.1-billion in assets and an MER of 0.16 per cent, followed by Evolve Funds Group’s High Interest Savings Account ETF (HISA), launched in November, which has $232.3-million in AUM and an MER of 0.17 per cent. CSAV and HISA have each returned about 0.4 per cent since their inception.
Horizons ETFs Management Canada Inc. launched the Cash Maximizer ETF (HSAV) last month, with an MER of 0.18 per cent and AUM of $220.4-million. It has returned about 0.2 per cent since inception.
A major draw for high-interest savings ETFs is that investors understand them, Mr. Tam says.
“There’s a bit of comfort in that for retail investors,” he says. And with the current market upheaval, “I would imagine that there is going to be more inflow in these kinds of assets.”
Market uncertainty is driving investors towards safer bets. In 2019, $14.6-billion flowed into fixed-income ETFs while only $10-billion flowed into equity ETFs, says Steve Hawkins, Horizons ETF’s chief executive officer.
The growth in fixed-income assets has been one of the key drivers of new high-interest savings ETFs, Mr. Hawkins says.
“You can’t look at that space without thinking whether or not you can launch a comparable product in it,” Mr. Hawkins says. “We believe that there will be a significant continued interest in these products going forward.”
Most of the high-interest savings ETFs generate cash that’s paid out in distributions at the end of each month, which then resets their net asset value to about $50 per unit. Since Horizons uses its corporate class structure, all interest is reinvested in the ETF, and investors don’t receive a monthly distribution.
Today’s low-interest-rate environment, which makes it tough for investors to earn interest on their money, is also fueling demand for high-interest savings ETFs, Mr. Tomiuk says.
“In these kinds of environments, there’s that natural demand from investors and advisers for cash products that are available to them that can generate a sufficient income,” he says.
Matthew Ardrey, vice-president and wealth adviser at TriDelta Financial Partners in Toronto, doesn’t recommend high-interest savings ETFs or high-interest savings accounts for his clients unless they’re saving for a short-term goal.
“Even if these [investments] produce 2 per cent net of fees, that’s basically doing inflation,” he says. “That doesn’t do anything for me for long-term planning.”
But Mr. Hawkins notes that all investors need to do is take a look at the paltry amount of interest they might earn in their own savings accounts versus a high-interest savings ETF to see the benefit of these products.
“If you’re going to be parked in cash, though, you should be generating the best yield that you can, and we believe that our product … is a significant benefit to the end investor, and we believe they should look at our product with open eyes,” Mr. Hawkins says.