Cash ETF

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Cash management
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Accounts and products
Cash management

Cash exchange-traded funds (Cash ETFs) are products that belong to the Cash and cash equivalents asset class. The units/shares trade on stock exchanges, but they are similar to high-interest savings accounts (HISAs) and are often known as HISA ETFs.[1][2]

This article explains how they work, what are the pros and cons, provides examples of cash ETFs trading in Toronto and mentions the recent regulatory review as well as possible alternatives.

How they work

When you buy a HISA from an online bank or when you buy an Investment Savings Account (ISA) trading as a mutual fund from a discount broker, you are in effect depositing your money directly with that institution. Instead, cash ETFs pool deposits from many investors and then deposit the money in the ETF’s name at Canada's major banks, and sometimes at other financial institutions.[1] This allows those ETFs to potentially negotiate better yields than small individual savers would get on a consistent basis (ignoring special offers and so on). Each cash ETF typically spreads its deposits at several Canadian banks, providing a form of diversification.

The net asset value (NAV) (and price) of cash ETFs is generally close to $50 per share/unit. In detail, the NAV (and price) increases progressively between monthly distributions because of accrued interest.[1][3] After the distribution is paid (in cash), the NAV (and price) fall back to $50.[4] This is a different mechanism than for money market mutual funds, which have a stable NAV and pay distributions as additional units.

Pros and cons

The biggest attraction of cash ETFs is their competitive yields, and this explains their rapid growth in assets under management.

Disadvantages include:

  • They are considered slightly more risky than traditional HISAs because (1) there is no CDIC guarantee, even on amounts less than $100k, given the pooling of the funds; (2) the units can trade below their NAV;[1]
  • Brokerage trading commissions (and bid-ask spreads) can reduce net returns over short periods and/or on small amounts;
  • You have to check currents prices versus the NAV before buying or selling.

Members of the Financial Wisdom Forum (FWF) have reported being unable to buy cash ETFs at certain discount brokers (see FWF topic below). The common interpretation is that those bank-owned discount brokers are protecting their in-house ISAs or money market funds (in mutual fund or ETF format) from competition.

Examples

Examples of cash ETFs trading in Canadian dollars on Canadian exchanges include:[1]

  • CI First Asset High Interest Savings ETF (CSAV)
  • Purpose High Interest Savings Fund (PSA)
  • High Interest Savings Account Fund, from Evolve ETFs (HISA)
  • Horizons High Interest Savings ETF (CASH)

Some products trading in US dollars are also available on the Toronto Stock Exchange.

Regulatory review and alternatives

Cash ETFs were reviewed by the Office of the Superintendent of Financial Institutions in 2023.[2][5] On October 31, 2023, the regulator confirmed a rule change[6] that according to the Globe and Mail, means that "cash ETF yields are likely to drop by 0.5 per cent annually"[7], making them less competitive. Another potential worry is that some cash ETFs might venture into "securities with higher yield and potentially more credit risk"[8] in an attempt to keep their yields up. So investors will "want to keep a close watch on how the various product sponsors respond to this news".[8]

In this context, prior to OSFI decision, ETF providers had already launched money market ETFs, which are like money market mutual funds that trade on stock exchanges.[9][10] Other options include normal HISAs.

Further reading

References

  1. ^ a b c d e Raymond Kerzérho, High Interest Savings Account ETFs, PWL Capital, October 13, 2022, viewed August 23, 2023.
  2. ^ a b Rob Carrick, High interest savings ETFs now pay 5 per cent, but that’s over if regulators step in, The Globe and Mail, Updated June 20, 2023, viewed August 22, 2023.
  3. ^ Investment Executive, Taking interest in high-interest ETFs, August 6, 2019, viewed September 10, 2023.
  4. ^ Evolve ETFs, High Interest Savings Account Fund, Frequently asked questions, March 2, 2022, viewed September 10, 2023.
  5. ^ OSFI reviewing liquidity treatment of high-interest savings account ETFs, Investment Executive, May 10, 2023, viewed August 24, 2023.
  6. ^ OSFI, OSFI upholds 100% liquidity requirement for HISA ETFs to promote financial resilience, October 31, 2023, viewed November 3, 2023.
  7. ^ Globe and Mail, Canada’s banking watchdog cracks down on high-interest cash ETFs that retail investors love(subscription required), October 31, 2023.
  8. ^ a b Post by DanH on the Financial Wisdom Forum, Novewmber 1, 2023.
  9. ^ Canadian ETF Flows for July 2023, National Bank Financial report, viewed August 24, 2023.
  10. ^ Investment Executive, With HISA ETFs under review, manufacturers push alternatives, July 24, 2023, viewed September 6, 2023.
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