Higher interest rates aren’t all bad news. While the cost of borrowing is much higher than it used to be, you can also earn much more interest on your savings than you could just a few years ago.
One vehicle that’s gaining popularity for taking advantage of higher interest rates is high-interest savings account (HISA) ETFs. These investments combine the best features of savings accounts with the versatility of stocks. But regulators are raising eyebrows about whether these investments are as safe as they appear.
What’s all the buzz around HISA ETFs, and could they be a worthwhile investment for you? Keep reading to find out.
What is an ETF?
You’re probably familiar with the concept of a high-interest savings account, but the second half of the acronym might be a little fuzzier.
Exchange Traded Funds (ETFs) combine multiple investments into a single security you can buy and sell like a stock. An ETF can comprise an entire market, a broad segment of a market, or other investments that have things in common. They work similarly to mutual funds, except they’re managed according to less ambiguous rules and have lower management fees.
The main benefit of ETFs is that they eschew stock picking in favour of broad-market investing. As a result, they tend to have better returns with lower fees than mutual funds and hand-picked stock portfolios.
Also read: GICs vs. the stock market
What is a HISA ETF?
A HISA ETF is an ETF that invests in high-interest savings accounts rather than stocks or other securities. HISA ETFs invest money into a number of different high-interest savings accounts that earn interest which is paid back to investors.
Most HISA ETFs aim to keep their share prices stable, and pay interest to investors as a monthly dividend. Depending on your strategy, you can choose to reinvest your dividends or withdraw them as cash. Between payments, share prices rise gradually to offset the upcoming dividend mimicking a daily interest payment.
What are the pros and cons of high interest savings ETFS?
HISA ETFs are interesting, but they’re not perfect. As with all investments, there are pros and cons to consider.
- Competitive interest rates. HISA ETFs invest in some of the best high-interest savings accounts in Canada and around the world. And because they are able to invest such a large amount of money, they have access to better interest rates than people like you and me can typically get. You can calculate your projected earnings using our compound interest calculator.
- Cash investment. Because HISA ETFs aren’t invested in stocks or other securities, it’s quick and easy to cash out. Most HISA ETFs can be converted to cash in one business day.
- Diversify your investments. When you invest in a HISA ETF, your money is spread across multiple high-interest savings accounts at different banks. As such, you won’t feel the difference as much when individual accounts change their rates from time to time.
- No minimum balance or time commitment. Unlike guaranteed investment certificates (GICs) and some high-interest savings accounts, there’s no minimum investment and no penalty for cashing out when you want to.
- No CDIC insurance. When you invest in a high-interest savings account, your deposits are protected by the Canada Deposit Insurance Corporation. When you invest in a HISA ETF, you may not benefit from that protection. The good news is you will likely have some protection provided by the Canadian Investment Protection Fund (CIPF).
- Commissions can eat into returns. To buy ETFs, you need to use an authorized investment broker that could charge a commission of $10 or more every time you buy and sell shares. To get around this, look for an online brokerage that offers commission-free trading.
- Management fees apply. Management fees pay the people who take care of your ETFs, and are usually charged as a percentage of your investments. It’s common to pay between 0.5% and 1% per year in management fees.
- Share prices aren’t necessarily equal to investments. Because ETFs are traded like stocks, the share price is set by the market and not necessarily equal to the value of the money invested in it. This can become a problem if speculators try to buy or sell too many shares at once which can artificially raise or lower the ETF’s share price.
Why are regulators concerned about HISA ETFs?
Investors have been increasingly interested in HISA ETFs over the past few years, especially as interest rates have risen rapidly. This has the Canadian banking regulator OSFI taking a closer look at the risks involved in these types of investments.
The primary concern is that banks may not be able to handle a sudden wave of HISA ETF investors cashing out their investments. Banks are currently only required to have a portion of these investments ready to pay out as cash on short notice, up to about 40% of total HISA deposits over a period of 30 days. The OSFI is concerned that people who invest in HISA ETFs are more likely to withdraw their money and would prefer banks be prepared to pay out 100% of those deposits.
The new rules, if enacted, would take effect in January 2024. Industry experts estimate that the average returns from HISA ETFs would fall by about 0.50% as a result of the changes.
Find the best high interest savings account rates in Canada
Are HISA ETFs a good investment?
Despite regulatory concerns, HISA ETFs are a relatively low-risk investment that could be a beneficial part of your portfolio. These investments have recently shown strong returns that exceed what you could likely make from investing in a high interest savings account on your own. However, they carry more risk than a typical HISA and lack the benefit of CDIC insurance.
If you want to earn high interest on your investments without taking on as much risk, consider a traditional high-interest savings account or GIC. The best GIC rates in Canada are currently as high as 5.50% for a one-year term with a minimum investment of as little as $100. GICs are eligible for CDIC insurance and are one of the safest investments available.
If your goal is to grow your wealth, however, you may prefer to take on more risk in return for a higher potential reward. High-interest savings accounts and GICs are only outperforming inflation by a couple of percentage points, so you may want to look at different investments if you’re saving for a long-term goal like retirement.
Higher interest rates aren’t all bad news, especially when it comes to savings. Investing in a HISA ETF is one way to tap into higher rates, but make sure you consider all the risks and benefits when choosing how to save for your future.