Bank of Canada Hikes Interest Rates 0.25%: HISA ETFs Yielding Up To 5%
These products are now offering a very enticing combination of decent yields and safety.
The latest Bank of Canada (BoC) interest rate hike is in, and it came in at 25 basis points, or 0.25%, much lower than its aggressive pace of 0.5% over the last few decisions.
By doing so, the BoC signaled that the current tightening cycle could be coming to an end. As such, the BoC will be watching inflation closely in the months ahead. As of December 2022, Canada's Consumer Price Index (CPI) clocked in at a 6.3% year-over-year increase.
Since the start of its hiking campaign at the beginning of 2022, the BoC has raised the policy interest rate up to 4.50%. The most obvious effect of this can be seen when it comes to rates for Guaranteed Investment Certificates (GICs) and High-Interest Savings Accounts (HISAs).
For ETF investors, the silver lining can be found in HISA ETFs, some of which now have a gross annual yield of up to 5%. Here's what you need to know about HISA ETFs and some of the available ones on the Canadian ETF market today.
How HISA ETFs work
The ETF structure is highly flexible and can hold a variety of assets, which include stocks, bonds, and even commodities. Notably, they can also hold deposits in HISAs, thus providing investors with an exchange-traded version of a regular HISA account.
The benefits of this approach stem from the liquidity provided by the ETF structure. Shares of HISA ETFs can easily be bought and sold throughout the day on exchanges, with minimal divergence from their net asset value (NAV) due to the ETF creation mechanism.
As an asset, these ETFs can be held in taxable and registered accounts alike, providing investors with a cash option for rounding out a portfolio of stocks and bonds. Many HISA ETFs pay monthly interest much like their regular bank counterparts do.
When it comes to safety, a HISA ETF is as safe as it gets. Although these products are not insured by the Canadian Deposit Insurance Corporation (CDIC), they have virtually no market risk. When stocks crash, HISA ETFs are able to maintain their value as they are not exposed to the market.
Unlike bond ETFs, HISA ETFs benefit from interest rate hikes. When rates go up, the price of bond ETFs go down. On the other hand, HISA ETFs do not suffer losses, and actually benefit from an increase in their yield, which makes them a good choice in a rising rate environment.
Things to watch out for in the HISA ETF space
The HISA ETF space is one of the most competitive in Canada, with numerous different ETF managers vying for market share. When it comes to assessing these products, investors should primarily consider:
- The ETF's gross annual yield expressed as a percentage.
- The ETF's management expense ratio expressed as a percentage.
Subtracting #2 from #1 will give you the fund's net annual yield, which is a measure of how much after fees an investor who holds the fund for a year can expect to earn (if the yield remained stable).
It's also important to keep in mind that the yield can change. If interest rates fall in the future, these products will yield less. Thus, they're best used as a short-term investment to park cash in or decrease your risk if you already have a portfolio of stocks and bonds.
The following HISA ETFs are available to Canadian investors. Clicking on each link will take you to a page where you can see a detailed breakdown and access their ETF facts document.
- Purpose High Interest Savings ETF (PSA): 5.01% gross yield, 0.17% expense ratio.
- High Interest Savings Account Fund (HISA): 4.99% gross yield, 0.05% expense ratio.
- CI First Asset High Interest Savings ETF (CSAV): 4.98% gross yield, 0.16% expense ratio.
- Horizons High Interest Savings ETF (CASH): 5.02% gross yield, 0.13% expense ratio.
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.
