ETF News

In recent years, Canadian investors have showcased a penchant for tools that amalgamate safety, simplicity, and decent returns. Therefore, its no surprise that Canadians have flocked to high interest savings account ETFs. 

They're liquid, entail low fees, offer yields that stride closely with interest rates, are marked by a significant lack of volatility, and the market is filled with numerous options caterings to varied investor preferences.

However, the landscape for high interest savings account ETFs may be shifting. On May 10, the Office of the Superintendent of Financial Institutions (OSFI) began a public consultation on the nature of high interest savings account ETFs and other similar wholesale products with retail-like characteristics, which could affect the future of these ETFs.[td1] 

Adding another layer of uncertainty, some bank brokerages have decided to block purchases of high interest savings account ETFs altogether. Such moves can understandably make an investor jittery about placing their trust and money in these instruments.[td2] 

Nevertheless, for those who are a tad anxious or simply seeking variety, the good news is that there are other avenues to explore. Alternatives with similar risk and return profiles are available for cash management needs. In today's article, I'll spotlight three alternative ETF types to consider.

Ultra-Short Term Bond ETFs

Our first alternative is the ultra-short term bond ETF. As their name suggests, these ETFs typically hold fixed income instruments with a very short maturity, typically under a year. Thanks to this, they tend to have a very low duration, reducing their sensitivity to interest rate fluctuations. 

However, the credit quality of the underlying bonds in these types of ETFs can vary. While they will usually include short-term Canadian government bonds, its not uncommon to also see floating rate notes, investment grade corporate bonds, preferred shares, and even high yield bonds. 

Thus, its important to note that these ETFs are not risk-free. While they may not shift much in response to interest rate changes, the risk of default is still present. Therefore, these ETFs may still lose value during a market crash, albeit not as badly as equities or other bond ETFs.

Examples of Canadian listed ultra-short term bond ETFs currently include the Franklin Bissett Ultra Short Bond Fund (FHIS) and the BMO Ultra Short-Term Bond ETF (ZST).

Money Market ETFs

Next up we have money market ETFs. Like their mutual fund cousins, these ETFs primarily hold very liquid, high quality, short-term (365 days maturity or less) fixed income instruments, which can include commercial paper, Treasury bills, and bankers' acceptances.

Like high interest savings account ETFs, money market ETFs will attempt to maintain a fixed net asset value (NAV) per share. For instance, a hypothetical fund may be fixed at $50 per share, and slowly creep up every month to say, $50.20 as the underlying interest accrues. When the interest is paid out monthly, the NAV drops back to $50, and the process repeats itself. 

Money market ETFs are generally considered a safer option compared to equity and bond ETFs, but still have default risk. Because they hold commercial paper and the likes, these ETFs are not entirely risk-free. However, they still rank very low on the risk spectrum. 

Examples of Canadian listed money market ETFs currently include the Purpose Cash Management Fund (MNY), the iShares Premium Money Market ETF (CMR), the BMO Money Market Fund ETF (ZMMK), and the CI Money Market ETF (CMNY).

Treasury Bill ETFs

Finally, we have Canadian Treasury bill ETFs like the newly launched Horizons 0-3 Month T-Bill ETF (CBIL), which as its name suggests only holds AAA rated Canadian government Treasurys with maturities of less than three month and has swelled to around $446 million in assets since its launch in April. 

“Often, when new products are launched, you expect the fund to resonate with one or two sides of the business in particular, whether that’s institutional, retail advisors or individual investors," says Jeff Lucyk, Executive Vice President, Sales at Horizons ETFs. "Suffice to say, the response to CBIL has been overwhelmingly positive across the entire industry, highlighted by the considerable in-flows since launch.

The nature of CBIL renders the ETF virtually immune to interest rate and default risk. However, the yield tends to be lower due to the lack of corporate fixed income exposure, with CBIL currently paying an annualized 4.67%. Nonetheless, some investors may consider this a fair trade-off for the lower risk. Like the previous options, CBIL pays out monthly. 

These characteristics, coupled with a competitive 0.10% management fee makes CBIL a potentially good option for short-term cash management needs. "With interest rates at the highest they’ve been in decades, there’s no safer place to park your cash than in Treasury Bills while being rewarded for doing so," Lucyk says. "CBIL has made investing in Canadian T-Bills – one of the safest assets available – easy and accessible for all Canadian investors.”

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.