ETF News

Canadian investors got a new addition to their toolbox in 2022: the First Home Savings Account (FHSA). For those aspiring to own their first home, the FHSA offers a structured and tax-advantaged way to save and invest towards this significant milestone.

The FHSA comes with a set of distinct advantages. Contributors can annually invest up to $8,000, with a ceiling of $40,000 for lifetime contributions. 

If, for any reason, you're unable to maximize your contribution in a given year, fret not. The FHSA allows for a carry-forward mechanism, where up to $8,000 of unused contribution room can be shifted to the subsequent year. 

Finally, individuals benefit from an income tax deduction for eligible contributions, and the account can be cashed out tax-free for a first home purchase. 

While Guaranteed Investment Certificates (GICs) and mutual funds are standard choices, the inclusion of ETFs as qualified investments eligible to be held in a FHSA stands out. ETFs, in my opinion, bring unparalleled versatility to the table, allowing investors to tailor their portfolios based on their unique needs and risk appetites.

Given the vast landscape of ETFs, choosing the right ones can be daunting, especially when the goal is something as significant as a home down payment. While the ideal composition of an FHSA will vary based on individual timelines and risk profiles, I believe there are a few standout ETF options that cater to a range of risk tolerances. 

Here are the two types of ETFs I would consider investing a $8,000 FHSA contribution in, with the safety of the principal and a modest level of growth in mind.

High interest Savings ETFs: Like a Bank Account, But Better

When considering investment options for an FHSA, high interest savings ETFs emerge as a compelling choice for those seeking a blend of decent returns with relative safety. 

Instead of investing in a diverse array of stocks or bonds, they primarily invest in high-interest savings accounts with Canadian banks. This approach allows them to offer attractive yields, often surpassing traditional savings accounts. 

One distinct feature of these ETFs is their pricing mechanism. Typically, the price per share remains flat, usually around the $50 mark. As interest accumulates over the month, the share price gradually increases.

However, once the interest is paid out to investors, the share price resets, dropping back to its original $50 level. Currently, many of these ETFs are boasting impressive yields, with some even surpassing the 5.35% net mark.

However, as with all investments, it's crucial to understand the associated risks. One might draw parallels between these ETFs and GICs. Yet, a significant distinction exists - unlike GICs, high interest savings ETFs are not CDIC insured. This means that while they are among the safer ETF options available, they are not entirely risk-free.

Furthermore, their relationship with interest rates is a nuanced one. On the one hand, rising interest rates can be a boon for these ETFs, leading to increased yields. On the other hand, when interest rates decline, the yields on these ETFs can diminish. 

Unlike GICs, where the interest rate is locked in for the duration of the investment, the yields on these ETFs are fluid, adjusting in tandem with prevailing market rates.

Here are some of the current high interest savings ETFs available to Canadian investors:

• High Interest Savings Account Fund (HISA)
• Purpose High Interest Savings ETF (PSA)
• CI First Asset High Interest Savings ETF (CSAV)
• Horizons High Interest Savings ETF (CASH)
• Ninepoint High Interest Savings Fund (NSAV)

Money Market ETFs: A Step Beyond High Interest Savings

For those investors who are comfortable embracing a tad more credit risk in pursuit of a marginally enhanced yield, money market ETFs present an intriguing alternative to high interest savings ETFs. 

At their core, both types of ETFs share similarities in their operational mechanics, such as a steady price per share and monthly interest, but the underlying assets they invest in set them apart.

While high interest savings ETFs channel their investments into savings accounts with Canadian banks, money market ETFs primarily invest in commercial paper, Treasury bills, and bankers' acceptances. Each of these instruments carries its own set of characteristics and risk profiles:

• Commercial Paper: Short-term, unsecured promissory notes issued by corporations. They typically come with maturities less than 270 days and are used for meeting short-term liabilities.
• Treasury Bills: Short-term government securities that mature in one year or less. They are sold at a discount to their face value and do not pay interest before maturity. Instead, their return is the difference between the purchase price and the face value at maturity.
• Bankers' Acceptances: Short-term credit investments created by non-financial firms and guaranteed by a bank. They are traded at a discount and are commonly used in international trade.

The inclusion of these instruments means that money market ETFs, while still relatively safe, do carry a slightly higher credit risk compared to high interest savings ETFs. However, in return, they often offer a slightly more attractive yield, making them appealing to investors willing to accept that trade-off.

Here are some of the current money market ETFs available to Canadian investors:

• Purpose Cash Management Fund (MNY)
• iShares Premium Money Market ETF (CMR)
• BMO Money Market Fund ETF (ZMMK)
• CI Money Market ETF (CMNY)

Canadian Treasury Bill ETFs: The Pinnacle of Safety

For investors who prioritize safety above all else, Canadian Treasury bill ETFs stand out as the paramount choice. These ETFs invest primarily in Treasury bills issued by the Canadian government, and from a credit risk perspective, they represent the zenith of security.

The reason behind their unparalleled safety is rooted in the issuer of the Treasury bills: the Canadian government. Governments, especially those of economically stable countries like Canada, are considered the most creditworthy entities. 

This is because they have the power to levy taxes and print money, ensuring they have the means to meet their debt obligations. Consequently, the likelihood of a default on a Treasury bill is exceedingly low, making it one of the safest investment instruments available. 

However, as with most things in finance, there's a trade-off. The heightened safety of Canadian Treasury bill ETFs comes at the cost of yield. As a result, while they offer unparalleled peace of mind, their yields are typically slightly lower than those of high interest savings ETFs.

Here are some of the current Treasury bill ETFs available to Canadian investors:

• Horizons 0-3 Month T-Bill ETF (CBIL)
• Guardian Ultra-Short Canadian T-Bill Fund (GCTB)

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.