Shocked by the ridiculously low interest rates on your cash reserves? And this, despite the sharp rise in interest rates over the past year?
In this case, one should take a look at more dynamic solutions than the lackluster savings products offered at mainstream banking firms.
Starting with exchange-traded funds (ETFs), which focus on high-interest savings products and very short-term financial securities traded on money markets.
Still unknown to individuals, these money market ETFs have emerged in force over the past year among sophisticated investors as a “safe haven” for liquidity during the turmoil in the financial markets.
Any indication of this popularity?
As 2023 begins, total assets under management among the five largest high-interest savings and money market ETFs listed on the Toronto Stock Exchange are approaching $12 billion.
This amount has more than doubled in less than a year, the result of a sequence of the largest monthly inflows of capital among all categories of ETFs listed on the Toronto Stock Exchange.
It’s what ?
As the name suggests, shares of high interest savings and money market ETFs are traded on major stock exchanges.
Unlike stock or bond ETFs, the unit value of these currency ETFs is stable at $50 per unit for Canadian dollar ETFs and $100 for US dollar ETFs.
These ETFs invest these sums in various short-term savings products generally accessible only to institutional investors. They thus provide a current return in interest income, paid monthly, which varies relatively synchronously with the key rates managed by the Bank of Canada or the Federal Reserve (Fed) in the United States.
Consequently, in tumultuous times on the financial markets, the stability of the value of the shares as well as their flexibility of transaction at low cost on the stock market are important attractions.
Thus, for example, the annualized rate of return according to the most recent monthly payments of the main Canadian money market ETFs is now around 4.6%.
This is almost double the average rate of return over the previous 12 months. And almost three times higher than a year ago, just before the sharp rise in key rates by the central banks.
For what main use?
High-interest savings and money market ETFs were designed and marketed as financial products with very low management fees that can be used to enhance portfolio cash returns.
According to experts consulted by The Presspurchasing units of these ETFs should be viewed as a very short-term cash “booster” and not as a bond investment strategy.
PHOTO DAVID BOILY, LA PRESSE ARCHIVES
Sylvain Tremblay, Vice President of Private Management at Optimum Gestion de Placements
“Money market ETFs have become a ‘hot topic’ among investors seeking to secure their portfolios during a very difficult year in both equity and bond markets,” says Sylvain Tremblay, Vice-President, Private Wealth. to the firm Optimum Gestion de Placements.
“However, the mistake of transferring a large portion of a portfolio to these money-type ETFs must be avoided, even with their current yield boosted by rising interest rates. These money market ETFs are not a substitute for investments in equities and bonds with a view to medium and long-term returns. »
At Desjardins Wealth Management, financial planner and investment advisor David Paré increasingly doubts the relevance of money market ETFs for investors.
“These funds have been very useful until recently to obtain a minimum return on cash during a very difficult period on the stock market and in the bond markets, with the sharp rise in interest rates by the central banks”, recalls David Paré .
PHOTO PROVIDED BY DESJARDINS SECURITIES
David Paré, financial planner and investment advisor at Desjardins Wealth Management
But with the increased possibility of an upcoming interest rate cap, and a rebound in the value of fixed income securities, the usefulness of money market ETFs may have had its day in managing portfolio liquidity.
David Paré, financial planner and investment advisor at Desjardins Wealth Management
In fact, advises David Paré, “apart from the cash that we plan to use over the next few months, it’s time to reposition our bond investments by favoring securities with longer maturities whose market value could benefit the more of a stabilization and a possible decline in interest rates”.
How to do it ?
For individuals, access to money market ETF units is through an investment account set up with a brokerage firm. It can be an unregistered investment account, and therefore subject to tax on investment income, or a registered investment account such as a retirement savings plan (RRSP) or tax-free savings plan (TFSA) with its tax advantages.
However, because they are investment products rather than bank-type savings products, money market ETFs are not covered by the Canada Deposit Insurance Corporation (CDIC). That said, the securing of money market assets managed by these ETFs is highly regulated and monitored by financial and banking authorities in Canada.
Money ETFs or one-year GICs?
The once significant interest yield differential between money market ETFs and short-term guaranteed investment certificates (GICs) offered by some financial firms has shrunk to near zero amid rate hikes by the Bank of Canada .
For example, one-year fixed-term GICs are now offered with interest rates to maturity in the range of 4.25% to 4.85% by financial firms other than the big banks, where interest rates Interest in GICs remains very low.
This is also what prompts Sylvain Tremblay, at Optimum Gestion de Placements, to recommend that individuals “shop around” for their cash management products at the end of the upward cycle in interest rates.
“Money market ETFs remain good tools to generate a little return on the cash that we expect to use over the next few months,” says Tremblay.
“But for cash that won’t be needed for a year, it’s best to shop around for one-year term GICs with competitive interest rates offered by smaller financial and banking firms that want to attract deposits.” . »
