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Rising interest rates in 2022 made a star out of a type of exchange-traded fund that lived in the shadows for most of the past decade.
Cash-equivalent ETFs, also called high-interest savings ETFs, ended the year with after-fee yields of about 4.6 per cent and a very comfortable risk profile for investors unnerved by the damage done to both stocks and bonds in 2022. This explains why the two ETFs with the highest inflows of money in the first 11 months of the year were cash-equivalent funds, as were the eighth and 15th best sellers.
Expect to see these ETFs remain in favour with investors until we see a convincing, sustained rally for stocks. Truth be told, a lot of investors will be too late in moving money from cash into the market. But at least they’ll earn an acceptable rate of return on their cash, if they balance both risk and reward.
Returns from cash-equivalent ETFs could actually improve. It all depends on what happens in early 2023 with the Bank of Canada’s overnight rate, which sets the trend for the yield on cash-equivalent ETFs. If the central bank nudges the overnight rate up by 0.25 of a point on Jan. 25, the next date for a potential change in rates, then cash-equivalent ETFs can be expected to start paying about 4.85 per cent.
There’s growing speculation that the Bank of Canada could start cutting rates by the end of next year. For now, though, investors have a low-risk place to sit while waiting for more clarity from stocks and bonds.
Cash-equivalent ETFs began appearing close to a decade ago, but were mostly a fringe product until rates surged in 2022. As of Nov. 30, the top-selling CI High Interest Savings ETF CSAV-T and Purpose High Interest Savings ETF (PSA-T) had combined year-to-date inflows of $4.1-billion and combined assets of close to $9-billion. The other funds to make the list of 20 best YTD sellers were the Horizons High Interest Savings ETF CASH-T and the Evolve High Interest Savings Account Fund HISA-NE.
Assets in cash-equivalent ETFs are held in bank savings accounts paying more interest than retail customers get. The money isn’t protected by deposit insurance, just the stability of our biggest banks.
Two downsides to cash-equivalent ETFs: Some online brokers charge as much as $9.99 to buy and sell them, and a trio of bank-owned brokers don’t allow clients to buy them at all. The three are BMO InvestorLine, RBC Direct Investing and TD Direct Investing.
Imagine how much bigger cash-equivalent ETFs would be if these three big bank-owned brokers didn’t give the impression that they put themselves ahead of clients.
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