We’re in a sweet spot right now for investors who want to park money in cash and earn a decent return.
Rates on investments designed to hold cash safely remain high, while inflation is declining. It was possible to get returns of 4 to almost 5 per cent on these investment products in early May, with low levels of risk. But how low, exactly?
Whether you use high interest savings accounts, T-bill funds or money market funds, your money is insulated from ups and downs in the stock and bond market. That’s the whole point of keeping money in cash.
Where cash equivalent investments differ is in the risk posed by the issuing financial company becoming insolvent. Some cash equivalents answer this risk by offering coverage from Canada Deposit Insurance Corp., while others do not.
Let’s not overplay the risk that the bank or financial company offering your HISA will go under. It’s highly unlikely, even in a year where three U.S. banks have failed. But if safety is a prime concern when investing the cash in your brokerage account, then you should understand which products are eligible for CDIC protection.
One of the most popular ways to park cash these days is in HISAs designed for investment accounts. The advantage of these products is that they’re right alongside your other investments and thus easy to manage. Plus, the interest rates start are better than almost all traditional high interest savings accounts available directly from banks.
Big banks and other financial companies offer HISAs for investment accounts that are bought and sold like mutual funds. Examples include the B2B High Interest Investment Account, the BMO High Interest Savings Account, the Equitable Bank High Interest Savings Account, the Home Trust High Interest Savings Account, the Manulife Investment Savings Account, the Renaissance High Interest Savings Account, the Scotiabank Investment Savings Account, the RBC Investment Savings Account and the TD Investment Savings Account.
A common feature with these products is that client holdings are considered eligible for CDIC coverage. That means deposits of up to $100,000 in combined principal and interest are protected against the issuer going under.
To confirm that HISAs are eligible for deposit insurance, consult their online product information sheets. You can find links to many HISA products in this May 6 post on the Mr. Thrifty blog (mrthrifty.ca). Note that a HISA issuer must be a CDIC member for deposit insurance to apply. CDIC confirms that U.S.-dollar HISAs are eligible for deposit insurance as well as those in Canadian dollars.
HISAs are also available in an exchange-traded fund format – in fact, HISA funds are one of the hottest selling ETF categories in recent months. The money investors have placed in these funds is held mainly in big bank savings deposits offering much better returns than are available through conventional savings accounts.
HISA ETFs are not eligible for CDIC protection, but the fact that holdings are kept in accounts at big banks offers a degree of security. As an example, the Horizons High Interest Savings ETF (CASH-T) has its assets in savings accounts at Canadian Imperial Bank of Commerce, National Bank of Canada and Bank of Nova Scotia.
Some of these HISA ETFs are available in mutual fund form as well. For example, there’s the CI High Interest Savings ETF (CSAV-T) and the CI High Interest Savings Fund, which is a mutual fund that holds shares of CSAV. The target audience for this fund would be investors and advisers who have access to mutual funds only. CI confirms that neither CSAV nor the CI High Interest Savings Fund are CDIC-eligible.
Something to be aware of with HISA ETFs is that the Office of the Superintendent of Financial Institutions, a federal banking regulator, is looking into them. OSFI wants to understand whether there are any liquidity concerns for the banks holding deposits from these ETFs. If OSFI sees any issues, it could order changes that would lower the interest rates retail clients earn from current levels around 4.8 per cent on an after-fee basis.
ETF companies offering HISA products have been hedging their bets lately by creating T-bill funds holding treasury bills issued by the Canadian government to finance its operations. There’s no CDIC protection here, but the federal government has a triple-A credit rating and thus presents virtually no risk of default.
T-bill mutual funds have been around for ages, as have money market mutual funds that hold both T-bills and short-term corporate debt. There is no deposit insurance on T-bill and money market funds, but they’re considered to be low-risk and generally maintain a steady value of $10 per unit while paying out interest on a monthly basis.
Investors have been pouring money into products designed to hold cash, which explains why there’s an ever-growing shelf of products to choose from. Risk-wise, all these products rank at the low end of the scale. But some are lower than others.
Rob Carrick